CREDIT  OF  THE   NATIONS 


A^ 


CREDIT 
OF  THE  NATIONS 

A  STUDY  OF  THE  EUROPEAN  WAR 


BY 
J.   LAURENCE  LAUGHLIN,  Ph.D. 

EMERITUS   PBOFE9SOB   OF  POLITICAL  ECONOMY   IN   THE   0NIVEBSITT   OF  CHICAQO 


3576/ 

NEW  YORK 
CHARLES  SCRIBNER'S  SONS 

1918 


COPTBIGHT,    1918,    BT 

CHARLES  SCRIBNER'S  SONS 


Published  March,  1918 


PREFACE 

It  may  seem  quite  audacious  to  try  to  include  within 
the  limits  of  one  moderate  volume  a  study  of  the  work- 
ings of  credit  in  several  of  the  principal  belligerent  na- 
tions in  the  European  War,  when  for  a  full  statement  of 
the  complex  credit  operations  in  any  one  of  them  a  sepa- 
rate volume  might  be  little  enough.  There  is  the  addi- 
tional reason  against  it  that  the  time  and  labor  in  collect- 
ing and  digesting  the  material  must  be  as  great  for  a 
condensed  as  for  an  extended  exposition.  Nevertheless, 
it  was  believed  that  an  examination  of  the  most  impor- 
tant measures  in  each  country,  told  in  plain,  untechnical 
language,  could  be  presented  within  a  compass  which 
would  not  require  more  time  for  its  perusal  than  a  busy 
man  of  affairs  could  afford.  Such  a  study  would,  further- 
more, bring  to  a  much  wider  constituency  an  insight  into 
the  hidden  workings  of  credit  behind  the  issues  of  paper 
money,  banking,  foreign  exchange,  and  public  finance. 
Stripped  of  their  technicalities,  these  matters  can  be 
made  easy  of  comprehension.  In  addition,  such  a  dis- 
cussion under  one  head  of  the  various  policies  of  the 
greater  nations  would  make  possible  a  comparative  study 
which  would  throw  light  on  the  successes  and  failures 
during  the  war  in  affairs  of  stupendous  importance  and 
magnitude.  Thereupon,  it  became  evident  that  for  our 
own  enlightenment  on  entering  the  struggle  we  needed 
not  only  the  facts  in  the  field  of  credit,  but  also  a  clear 
and  simple  presentation  of  the  principles  underlying  these 
facts,  together  with  a  vigorous  criticism  of  governmental 
policies  in  the  light  of  these  principles.     Thus  it  was 


vi  PREFACE 

hoped  to  make  at  once  a  constructive  as  well  as  an  ob- 
jective study  of  events  never  before  equalled  in  the  his- 
tory of  nations. 

The  necessity  of  having  instruction  from  the  experi- 
ences of  other  belligerents  for  our  own  guidance  and  ad- 
monition may  justify  somewhat  the  boldness  of  trying  to 
make  such  a  study  when  we  are  so  close  to  the  events 
concerned;  and  some  indulgence  must  be  asked  for  on 
that  ground.  But  it  will  be  found,  nevertheless,  that  we 
have  very  definite  knowledge  regarding  credit  operations 
during  the  first  three  years  of  the  war — a  period  to  which 
our  study  is  confined,  and  which  in  the  main  excludes  the 
war  operations  of  the  United  States — that  allows  of  satis- 
factory analysis  at  this  date,  because  it  is  a  period  long 
enough  to  enable  us  to  watch  all  the  essential  principles 
of  credit  at  play.  Further  years  of  the  war  will,  of 
course,  introduce  more  facts  to  be  elucidated,  but  will 
not,  in  all  probability,  modify  the  lessons  already  drawn. 

No  attempt  has  been  made  to  treat  the  credit  opera- 
tions of  Russia,  Austria-Hungary,  or  Italy,  because  it 
has  been  impossible  to  obtain  sufficient  reliable  data  for 
their  examination.  For  obvious  reasons  emphasis  has 
been  laid  on  the  affairs  of  Germany.  Her  amazing  in- 
dustrial growth  in  the  last  thirty  years  and  its  causes 
show  that  Germany  brought  on  the  war,  not  because  she 
was  hampered  on  the  seas,  or  had  no  room  for  the  growth 
of  her  population,  but  because  her  newly  acquired  eco- 
nomic strength  warranted  a  militaristic  attempt  to  domi- 
nate Europe  and  the  world.  The  examination  of  her 
credit  situation  leads  to  the  conclusion  that  Germany  is 
not  now  solvent,  and  that  unheard-of  burdens  must  be 
carried  even  into  the  distant  future.  Taxing  little  and 
borrowing  much,  she  has  risked  all  on  a  single  throw  of 
the  dice,  on  a  military  decision.    She  is  even  now  fighting 


PREFACE  vii 

not  merely  for  the  status  quo  ante,  but  for  commercial 
gains,  for  expansion,  if  not  for  indemnities  which  will  re- 
trieve her  financial  losses.  Indeed,  her  industrial  classes 
were  as  much  responsible  for  the  war  as  her  militarists; 
so  that  the  weakening  of  her  credit  is  likely  to  induce 
these  industrial  classes  to  work  mightily  for  peace.  The 
end  is  more  to  be  looked  for  through  their  influence  than 
through  a  revolt  of  the  masses.  The  charge  on  the  pres- 
ent debt  of  over  $30,000,000,000,  together  with  an  ordi- 
nary peace  budget,  takes  up  the  total  net  income  of  the 
German  people.  With  such  matters,  as  well  as  with  the 
inflation  of  credit,  the  nearly  tenfold  increase  of  paper 
money  by  the  Reichsbank  and  loan  bureaus,  the  de- 
preciation of  the  mark  by  about  50  per  cent,  the  rise  of 
prices  of  over  100  per  cent,  the  present  volume  is  con- 
cerned. 

One  of  the  main  purposes  in  mind  has  been  a  com- 
parison of  the  ways  by  which  the  German,  French, 
British,  and  American  systems  of  credit  have  met  the 
unparallelled  shocks  of  this  unprecedented  war.  That 
British  credit  has  shown  itself  superior,  and — in  spite  of 
the  erratic  plunge  into  government  paper  money — has 
avoided  the  dangerous  currency  expansion  connected 
with  advances  to  the  state  in  France  and  Germany,  is 
one  of  the  plain  inferences  from  a  study  of  this  war, 
which  is  rich  in  counsel  for  the  management  of  our  own 
credit  operations. 

Somewhat  extended  treatment  has  been  given  to  the 
problems  of  gold,  the  foreign  exchanges,  inflation  and 
prices  in  all  the  countries  concerned.  The  recrudescence 
of  the  archaic  quantity  theory  of  money  in  Great  Britain 
among  those  discussing  prices  and  inflation  there  has  given 
cause  for  a  pointed,  but  brief,  criticism  of  that  theory. 
Indeed,  the  events  of  this  war  are  likely  to  bring  about 


viii  PREFACE 

much  re-examination  of  the  principles  regulating  money 
and  prices.  The  recent  appointment  of  a  British  Com- 
mission on  the  Currency  and  the  Bank  Act  of  1844  is  a 
sign  of  the  times. 

The  years  chosen  for  our  study  are  big  with  matters 
touching  money  and  credit.  It  may  not  be  amiss  to  sin- 
gle them  out,  unclouded  by  details,  for  enlightenment  in 
our  present  emergencies.  In  this  way  we  may  be  better 
able  to  make  an  intelligent  assessment  of  the  elements  in 
our  own  pressing  problems. 

J.  Laurence  Laughlin. 

Jaffkey,  N.  H. 


CONTENTS 

CHAPTER    I.    THE    ECONOMIC    SITUATION    PRECEDING 

THE  WAR 

PAGE 

§  1.     The  Modern  Industrial  Revolution 1 

§  2.     General  Forces  at  Work 2 

§  3.     The  Facts  of  Germany's  Industrial  Progress      ....  12 

§  4.     Causes  of  Germany's  Development 23 

§  5.     Effect  on  Germany's  Foreign  Policy 29 

§  6.     Direct  Causes  of  the  War 34 

CHAPTER  II.      WAR  AND  CREDIT 

*  \4  1.  •  Credit  and  Money 39 

§  2.     Relation  of  Credit  to  Wealth  and  Capital 44 

§  3.     Waste  in  Time  of  Peace 46 

§  4.     Destruction  in  War 49 

§  5.     Economic  and  Financial  Exhaustion 52 

§  6.     Limit  to  Borrowing 56 

^  7.     Dependence  of  Credit  on  Money 60 

^  8.     Why  Credit  is  Supposed  to  be  Limited  by  Money        .      .  65 

.,     CHAPTER  III.      ENGLISH  CREDIT  OPERATIONS 

§  1.     Organization  of  Credit  in  England 70 

§  2.     Situation  at  the  Outbreak  of  War .  76 

§  3.     The  Sudden  Crisis  in  English  Credit 78 

§  4.     Remedies  Adopted 85 

§  5.     The  Gold  Question 101 

§  6.     Adjustment  to  War  Conditions 105 


X  CONTENTS 


PAOB 


§  7.  Inflation  and  Prices 114 

§  8.  The  Foreign  Exchanges 121 

§  9.  Government  Borrowing 133 

CHAPTER  IV.      FRENCH  MONEY  AND  CREDIT 

§  1.  French  System  of  Credit 143 

§  2.  Conditions  AMien  War  Came 151 

§  3.  Early  Effects  of  the  War 156 

§  4.  Services  of  the  Bank  of  France 165 

§  5.  Fiscal  and  Monetary  Functions  Confused 176 

§  6.  Depreciation  and  Prices 179 

§  7.  Foreign  Exchange 183 

§  8.  Fiscal  Methods 189 

CHAPTER  V.      GERMAN  CREDIT  OPERATIONS 

§  1.  Preparations  for  War 197 

§  2.  Organization  of  Credit  in  Germany 205 

§  3.  Supplementary  War  Institutions  of  Credit 213 

§  4.  Fnst  Effects  of  War 219 

§  5.  Work  of  the  Reichsbank 226 

§  6.  Gold         233 

§  7.  Solvency  of  German  Credit 238 

§  8.  Dislocation  of  Trade ^^  . .  243 

§  9.  Depreciation  and  Prices 245 

§10.  Foreign  Exchange 249 

§11.  Methods  of  Financing  the  War 257 

CHAPTER  VI.    WAR  AND  CREDIT  IN  NEUTRAL  UNITED 

STATES 

§  1.  Credit  Conditions  before  the  War 278 

§  2.  First  Shocks  to  Credit  in  1914 283 


CONTENTS 

xi 

§3. 

Means  of  Relief 

PAGE 

...      297 

§4. 

Upheaval  in  Foreign  Trade 

.      .      .     306 

§5. 

Movement  of  Securities 

...     319 

§6. 

Foreign  Exchange  and  Gold 

.      .      .     322 

§7. 

Inflation  and  Prices 

...     346 

§8. 

Loans  to  Other  Countries 

...     353 

APPENDICES 


APPENDIX  I.      GREAT  BRITAIN 

A.  Currency  and  Bank  Notes  Act,  August  6,  1914    ....  363 

B.  Treasury  directions  under  the  same 364 

C.  Proclamation  postponing  payment  of  bills  of  exchange  .  366 

D.  Treasury  paper  of  August  13,  1914,  regarding  discount  by 

Bank  of  England 366 

E.  Formal  arrangement  under  D 367 

APPENDIX  II.      FRANCE 

A.  Suspension  of  specie  payments  by  the  Banque  de  France. 

Law  of  August  5,  1914         369 

B.  Moratorium,  August  9,  1914 369 

C.  Transactions  in  Securities,  September  27,  1914    ....  371 

APPENDIX  III.      GERMANY 

A.  Bank  Act  of  March  14,  1875 372 

B.  Altering  Bank  Act,  August  4,  1914 382 

C.  Supplement  to  regulations  of  the  imperial  debt    ....  383 

D.  Modifying  the  Mint  Act 383 

E.  Darlehnskassen  Act 384 


xii  CONTENTS 

APPENDIX  IV.      UNITED  STATES 

PAGE 

A.  Amendment  of  Federal  Reserve  Act,  August  4,  1914      .      .  388 

B.  Registry  of  foreign -built  ships 389 

C.  Act  April  24,  1917 390 

D.  Loans  to  Allies 392 

Index 401 


CHARTS 

PAGE 

I.     Relative  Progress  of  Leading  Countries,  1880-1912    .      .  14 

II.     Bank  of  England,  1914-1917 90 

III.  English  Foreign  Trade,  1914-1917 108 

IV.  Bank  of  France,  1914-1917 167 

V.     Reichsbank,  1914-1917 229 

VI.     Gold  Imports  and  Exports  of  the  United  States,  1913- 

1917 283 

Vn.     Merchandise  Imports  and  Exports  of  the  United  States, 

1911-1917 290 

Vni.     New  York  Clearmg-House  Banks,  1914 295 

IX.     Course  of  Dollar  Exchange  on  Neutral  Places,  1914-1917  342 


CREDIT  OF  THE  NATIONS 


CHAPTER  I 
THE   ECONOMIC    SITUATION    PRECEDING   THE   WAR 

Unparalleled  industrial  revolution  since  1880 — New  era  of  power — 
Progress  in  transportation — Opening  of  new  resources — Gains  in 
mechanics  and  chemistry — New  business  organization — Upheaval 
in  education — Evolution  of  credit — German  growth  part  of  world- 
wide movement — Relative  progress  of  leading  nations — Charac- 
teristics of  German  improvement,  1880-1910 — Causes  underlying 
it — Effect  of  industrial  success  on  German  foreign  policy — Direct 
causes  of  the  war. 

§  1.  Even  though  the  immediate  causes  of  the  Euro- 
pean War  may  have  been  dynastic  ambition,  exaggerated 
nationalism,  and  lust  for  power,  the  ultimate  causes  are 
undoubtedly  to  be  found  in  economic  condi- 
tions. However  active  these  immediate  influ-  Tf'®^"^"^*"^ 
ences  may  have  been,  they  were  limited,  or 
guided,  sometimes  unconsciously,  by  the  underlying  eco- 
nomic forces.  In  the  period  since  1880  commercial  rival- 
ries have  not  been  so  much  struggles  for  actual  existence 
as  they  have  been  races  against  others  for  the  foremost 
place  in  an  unparalleled  industrial  development  going  on 
in  many  countries.  It  was  the  period  of  a  world-wide 
industrial  renaissance,  without  doubt  the  most  striking  in 
the  whole  course  of  human  history.  Nothing  in  the  past 
has  ever  equalled  it.  There  had  been  in  earlier  years 
special  achievements  like  the  steam-engine,  or  the  rail- 
way, or  the  steamship,  or  the  telegraph,  but  in  this 
period  all  began  to  work  together,  fusing  their  individual 
gains  into  one  expansive  ever-rising  stream  of  conquests 
over  nature  which  has  made  unequalled  the  recent  amaz- 
ing industrial   revolution  in   which   we  are  now  living. 

1 


2  CREDIT  OF  THE  NATIONS 

All  that  had  gone  before  seemed  now  to  burst  into  a 
universal  fruitage.  Moreover,  scarcely  any  article  of 
common  use  to-day  has  been  left  untouched  by  progress 
either  in  the  methods  of  its  manufacture  or  in  its  cost 
of  production.  So  wide-reaching  and  so  varied  has  been 
this  evolution  of  the  world's  productive  forces  that  it 
can  here  be  only  sketched  in  outline;  for,  however  neces- 
sary an  understanding  of  them  may  be  to  the  scenario  of 
the  European  War,  an  adequate  and  complete  statement 
in  this  place  would  make  the  portico  of  our  edifice  far 
larger  than  the  edifice  itself. 

§  2.  In  the  conquest  of  man  over  nature  nothing  has 
been  more  striking  during  this  period  of  about  thirty  years 
(1880-1910)  than  the  rise  of  a  new  era  of  power.  The 
^g  manufacture    of    power   has    created    a    new 

manufacture    epoch.     *'No  changes  have  ever  equalled  those 

power.  through  which  the  world  is  now  passing."^ 
Wherever  and  when  needed,  man  can  now  manufacture 
practically  unlimited  power  which  relieves  him  of  human 
labor.  No  longer  are  we  confined  to  the  bank  of  a  river 
or  to  a  waterfall  as  a  site  for  a  factory;  nor  are  we  de- 
pendent on  the  power  of  horses  or  animals,  nor  on  the 
uncertain  power  of  the  wind.  Although  the  steam-engine 
was  developed  in  1769,  the  manufacture  of  power  by 
steam  has  come  to  full  fruition  only  in  the  present  epoch. 
Electricity  has  been  used  not  only  as  a  new  source  of 
power,  but  as  a  conveyor  of  power  to  distant  plants. 
The  introduction  of  the  gas-engine  into  the  service  of 
every-day  tasks  in  the  shop,  on  the  farm,  and  in  the 
automobile,  the  harnessing  of  waterfalls  to  produce  en- 
ergy and  power  are  practical  illustrations  of  what  has 

^  The  New  Epoch,  by  George  S.  Morison  (1903),  to  which  the  author  is  much 
indebted. 


THE  ECONOMIC  SITUATION  3 

recently  come  to  aid  in  the  production  of  our  satis- 
factions. Now  enormous  amounts  of  power  can  be  con- 
centrated where  power  could  not  before  be  had;  this  in- 
animate power  relieves  animal  and  human  labor;  while 
the  mind  of  man  is  now  released  to  designing  methods 
and  tools  for  applying  power.  Man  has  been  thereby 
promoted  from  physical  to  mental  and  directing  tasks. 
We  are  in  this  period  indeed  living  in  the  midst  of  changes 
such  as  were  never  equalled  in  the  history  of  the  world. 

In  this  same  period  undoubtedly  the  greatest  applica- 
tion of  power,  working  for  a  fuller  production  and  so  for 
an  enlarged  social  consumption  and  development;  for  an 
opening  of  new  resources,  giving  room  not  cheapened 
only  for  a  larger  population  but  for  a  higher  cost  of 
standard  of  living;  for  the  cheaper  distribu-  *°^^ 
tion  of  goods  from  the  producer  to  the  consumer;  for  the 
easier  movement  of  coal  and  ore,  and  other  materials, 
such  as  cotton  and  metals,  to  the  centres  of  industry; 
for  the  placing  of  the  products  of  one  climate  at  the 
disposal  of  the  inhabitants  of  another, — has  appeared  in 
the  remarkable  progress  in  the  means  of  transportation 
by  land  and  sea.  Not  only  has  this  expanding  force 
steadily  modified  the  material  comfort  of  increasing  mil- 
lions of  men,  but  it  has  introduced  marked  changes  into 
political  and  international  relations.  Where  in  the  be- 
ginning of  this  period  life  was  narrow,  provincial,  and 
remote,  now  a  cosmopolitan  newspaper  is  delivered  over- 
night to  the  farmer's  door.  Great  Britain,  or  New  Eng- 
land, can  devote  itself  entirely  to  machine-made  indus- 
tries, without  giving  any  serious  attention  to  its  own  pro- 
duction of  food,  because  the  fertile  districts  of  Dacotah, 
Argentine,  Australia,  and  the  Danube  are  brought  near 
by  quick  and  cheap  transportation.  Thereby,  also,  the 
interdependence  of  trade  has  made  nations  much  more 


CREDIT  OF  THE  NATIONS 


Railway 

extension. 


dependent  on  each  other — a  fact  that  makes  modern  war, 
which  cuts  off  exports  and  imports  on  a  colossal  scale, 
more  disastrous  than  wars  of  earlier  decades. 

While  there  had  been,  earlier  in  the  nineteenth  cen- 
tury, the  application  of  the  steam-engine  to  railway  trans- 
portation, as  well  as  the  discovery  of  anthracite  coal, 
leading  to  the  development  of  the  iron  indus- 
try, the  really  important  phase  of  railway 
building  and  railway  extension  began  in  the 
seventies  and  culminated  through  this  period  we  have  in 
mind.  From  1880  to  1914  the  total  mileage  of  railroads 
in  operation  in  the  United  States  expanded  by  282  per 
cent  (from  93,267  to  263,547) ;  while  the  charge  for  carry- 
ing a  bushel  of  wheat  from  Chicago  to  New  York  by  rail 
fell  from  19.9  cents  in  1880  to  9.6  cents  in  1910.  And 
what  was  true  of  the  United  States  was,  in  the  main,  true 
of  other  countries.  From  1880  to  1910  the  railways  of 
the  world  increased  283  per  cent  in  miles  of  lines,  while 
the  miles  of  telegraphs  grew  by  300  per  cent.^  In  particu- 
lar countries  the  rate  of  gain  varied,  Russia  and  Italy 


•  Country 

Miles  of  line 

Per  cent  of 
increase  to  1910 

Tons  carried 

Per  cent  of 
increase 

France: 

1880 

14,736 
25,072 

21,052 
38,092 

5,340 
10,538 

14,824 
18,164 
41,818 

17,933 
23,389 

70 
81 
97 

182 
30 

89,037,635 
190,965,819 

176,799,144 
597,140,439 

10,283,530 
42,376,809 

75,480,187 
262,494,980 

263,542,304 
576,160,263 

114 
239 
310 

250 
119 

1910 

Germany: 

1880 

1910 

Italy: 

1880 

1910 

Russia: 

1880 

1890 

1910 

United  Kingdom: 

1880 

1910 

THE  ECONOMIC   SITUATION  5 

growing  in  mileage  and  tonnage  faster  than  Germany; 
while  Germany  surpassed  the  United  Kingdom,  in  which 
an  earHer  start  allowed  less  relative  gain. 

Moreover,  progress  on  ocean,  went  on  hand  in  hand 
with  progress  on  land,  transportation.  In  this  period  the 
reliance  on  the  obsolete  form  of  wind  propulsion  was 
largely  given  up,  as  shown  in  the  decline  of  the 
world's  sail  tonnage  by  1910  to  one-third  of  f,e?ghts!"*'' 
its  amount  in  1880;  while  its  steam  tonnage 
had  multiplied  fourfold,  coincident  with  a  gain  of  com- 
merce throughout  the  world  of  about  230  per  cent.  This 
phenomenal  extension  of  sea-borne  traflSc  was  made  pos- 
sible by  the  development  of  the  modern  steamship.  "  The 
power  generated  in  a  modern  steamship  in  a  single  voyage 
across  the  Atlantic  is  more  than  enough  to  raise  from 
the  Nile  and  set  in  place  every  stone  of  the  great  Egyp- 
tian pyramid."^  The  introduction  of  the  screw  propeller, 
necessarily  followed  by  iron  and  steel  ships,  the  develop- 
ment of  the  steam-engine  for  large  vessels,  the  surprising 
increase  in  length  and  beam  to  allow  manyfold  the  car- 
rying capacity,  the  devices  for  quick  loading  and  un- 
loading, and  the  establishment  of  new  lines  of  steamers 
and  new  routes  to  hitherto  inaccessible  parts  of  the  world 
account  for  the  Increase  of  the  world's  commerce  and  a 
fall  in  ocean  freights  corresponding  to  that  on  railways. 
For  instance,  the  cost  of  carrying  a  bushel  of  wheat  from 
New  York  to  Liverpool  fell  from  5 ltd.  in  1880  to  Ij/^d. 
in  1910,  or  to  about  one-fourth.  The  improvement  of 
the  marine  engine  so  that  the  coal  consumption  was 
reduced  to  less  than  a  pound  and  a  half  per  indicated 
horse-power,  made  possible  the  speed  of  the  Atlantic 
liner  and  the  extremely  cheap  carriage  of  the  tramp 
freight  steamer.     Thus  were  the  gains  in  transportation, 

*  Morison,  ibid.,  p.  5. 


6  CREDIT  OF  THE  NATIONS 

permitting  a  vast  increase  in  the  world's  population, 
accompanied  by  a  reduction  in  the  cost  of  subsistence. 
Such  were  the  triumphs  of  peace. 

This  period  is  further  memorable  for  the  opening  of 
new  resources  throughout  the  world,  made  possible  by 
the  extension  of  cheap  transportation,  and  thereby  hold- 
ing back  on  a  scale  never  before  known  in 
cofoniMtion  cconomic  history  the  tendency  to  diminishing 
returns.  In  this  countrj^  there  was  witnessed 
the  occupation  and  cultivation  of  the  wide  territory  west 
of  Minnesota,  Iowa,  Missouri,  and  Arkansas,  which  added 
vast  stores  of  wheat,  corn,  cotton,  cattle,  coal,  and  metals 
to  our  use,  and  gave  an  undreamed-of  stimulus  to  our 
home  markets  for  all  kinds  of  manufactures.  But  the 
United  States  was  enjoying  only  its  share  of  a  world-wide 
movement.  The  same  forces  were  at  work  wherever  on 
the  globe  civilization  and  enterprise  were  carrying  the 
results  of  invention  and  industrial  progress.  It  might 
truthfully  be  said  that  this  period  was  one  charac- 
terized by  industrial  colonization,  an  inevitable  conse- 
quence of  improved  transportation.  It  saw  the  opening  of 
new  ports  and  the  development  of  great  territories  hith- 
erto inaccessible  in  Africa,  Australasia,  China,  Japan, 
South  America,  and  British  North  America.  With  the 
multiplication  many  times  over  of  the  products  for  gen- 
eral consumption,  there  was  besides  an  increase  in  still 
greater  proportion  of  the  supply  of  gold.  The  movement 
of  more  goods  led  to  greater  activity  in  the  mechanism 
and  organization  of  credit  and  banking,  not  in  one  coun- 
try, but  in  all  countries. 

As  we  proceed  there  are  unrolled  before  us  additional 
conquests  of  intelligence  and  science  over  nature,  particu- 
larly in  the  field  of  mechanics  and  chemistry.  It  would 
be  folly  to  attempt  a  catalogue  even  of  the  more  char- 


THE  ECONOMIC  SITUATION  7 

acterlstic  inventions  which  have  abridged  costs  in  the 
work  of  the  world's  industries.  Improved  locomotives 
have  brought  greater  speed  and  hauled  longer  trains; 
standardization  and  interchangeability  of  parts  made 
cheaper  and  better  watches,  firearms,  and  agricultural 
implements;  special  tools  and  machinery  changed  rods 
into  screws  and  metal  into  pages  of  type;  new  devices 
have  made  possible  difficult  irrigation  schemes  and  even 
the  Panama  Canal.  Everywhere,  notably  in  the  electri- 
cal field,  have  new  inventions  revolutionized  the  processes 
of  industry.  Steel  instead  of  iron  has  become  the  order 
of  the  day.  "Only  twenty  years  ago,"  says  Morison, 
"nothing  typified  the  strain  of  human  labor  more  than 
the  row  of  furnaces,  in  which  the  puddlers,  by  muscular 
effort  and  in  glaring  heat,  slowly  drew  together  the  parti- 
cles of  soft  metal  into  the  spongy  puddle-ball,  from  which 
wrought  iron  was  forged  and  rolled.  To-day  the  Besse- 
mer converter  and  the  open-hearth  furnace  have  spoken 
the  doom  of  wrought  iron,  which  is  disappearing  before 
the  less  costly  steel,  and  there  is  nothing  more  striking 
about  a  great  steel  plant  than  the  absence  of  men." 

The  economics  of  chemistry  disclose  a  wide  ramifica- 
tion in  the  applications  of  principles  to  practical  industry. 
Vegetable  dyes,  for  instance,  have  given  way  to  newer 
commercial  products,  which  revolutionized  the 
whole  dye  industry;  and  in  this  progress  Ger-  indusb-y."  ^ 
many  had  taken  the  lead.  In  the  recovery  of 
by-products  of  coal  and  oil  hundreds  of  new  commodities 
have  appeared.  In  the  steel  industry  the  Bessemer 
process  (1864)  cheapened  the  making  of  steel;  the  re- 
moval of  phosphorus  from  the  ores  by  Sidney  Gilchrist 
Thomas  allowed  poorer  ones  to  be  used;  and  the  open- 
hearth  Siemens  furnace  followed.  All  these  are  charac- 
teristic of  the  modern  industrial  revolution.     Nor  are 


8  CREDIT  OF  THE  NATIONS 

they  confined  to  any  one  country,  since  scientific  gains 
become  universal  property. 

Moreover,  while  in  previous  decades  events  had  been 
preparing  for  later  triumphs,  the  culmination  of  many  con- 
tributing causes  in  producing  a  wholly  unprecedented  era 
-,         ,  of  industrial  change  is  the  mark  of  this  period. 

business  Thcsc  cliangcs   in   economic  methods,   more- 

organiza  on.  ^y^j.^  jg^^  inevitably  to  a  new  development  in 
business  organization.  The  corporation  early  arose  to 
meet  the  need  of  a  large  capital  supplied  by  many  small 
contributors,  thus  distributing  the  risks  of  enterprise; 
but  the  significant  use  of  corporate  forms  in  large  com- 
binations of  industrial  operations  did  not  come  until  late 
in  this  period.  When  several  hundred  thousand  dollars 
are  paid  for  a  single  steam-hammer,  or  a  single  train  of 
tools  in  a  modern  plant,  the  whole  establishment  requires 
vast  capital,  with  the  result  that  production  on  a  large 
scale,  by  the  use  of  inanimate  power,  lessens  the  amount 
of  human  labor  relative  to  the  power  developed;  but  it 
enables  the  laborers  to  receive  the  highest  wages  at  the 
same  time  that  their  goods  undersell  in  Asiatic  markets 
those  of  laborers  (unaided  by  these  mechanical  marvels) 
who  receive  only  one-tenth  the  wages.  For  this  obvious 
reason  the  period  may  be  described,  also,  as  an  era  of 
corporations.  In  our  country  underlying  economic  con- 
ditions have  brought  us  the  "trust"  problem;  while  in 
Germany  the  Kartel  has  arisen  from  the  same  evolution. 
In  every  country  the  inevitable  presence  of  large  produc- 
tion has  created  its  special  problem,  no  matter  how  dif- 
ferently it  has  been  met. 

Not  less  significant  in  its  influence,  and  because  it  has 
been  an  inevitable  consequence  of  the  new  conditions  of 
industry  and  science,  has  been  the  upheaval  in  the  con- 
servative ways  of  education.     The   new   forces   of  the 


THE  ECONOMIC  SITUATION  9 

world  call  for  men  trained  in  new  ways.     The  educa- 
tion for  the  old  so-called  "learned  professions"  is  not 
adapted  for  training  the  men  who  must  invent, 
design,    and    manage   the   mechanism    called  ^^^0^ 

forth  by  the  use  of  newly  developed  forces.  A 
premium  of  material  success  is  now  set  on  an  entirely  new 
type  of  industrial  leader  and  entrepreneur.  An  accurate 
and  disciplined  mind,  able  to  direct  men,  taught  how  to 
think,  how  to  investigate  and  construct  with  mathemati- 
cal exactness  and  with  precise  knowledge  of  the  laws  of 
matter,  or  of  the  chemical  composition  of  substances — 
the  need  for  men  of  such  quality  demanded  a  new  type 
of  education.  In  addition,  nine-tenths  of  the  public 
questions  and  of  the  problems  of  the  entrepreneur  became 
economic;  and  education  had  to  provide  place  not  only 
for  science  and  its  applications  in  new  ways,  but  also  for 
economic  and  public  administration.  The  man  trained 
only  in  the  law  was  no  longer  the  best  legislator. 

Apart  from  the  education  of  men  for  the  highest  posts 
of  industry,  the  mechanical  and  vocational  training  which 
made  a  skilled  artisan  became  recognized  in  the  new  era 
as  a  source  of  superiority.  Stupidity  became  a  crime; 
efficiency  a  necessary  virtue.  The  country  which  sur- 
passed others  in  recognizing  the  needs  of  the  new  era  and 
best  trained  its  artisan  class  gained  most  in  the  keen  in- 
dustrial competition  which  had  arisen  in  this  period.  As 
we  shall  soon  see,  Germany  was  one  of  the  quickest  to 
see  the  value  of  thorough  and  exact  training  for  its 
working  classes.  In  this  respect  Great  Britain  and  the 
United  States  have  been  slow  to  follow. 

As  a  consequence  of  the  multiplication  of  products 
suited  to  men's  use,  came  the  new  problems  of  their  quick 
and  easy  exchange  in  all  markets.  Apart  from  the  price- 
making  of  goods   in   terms  of  a  standard  money,  the 


10  CREDIT  OF  THE  NATIONS 

devices  for  exchanging  them  were  not  confined  to  forms 
of  money.  In  the  evohition  of  various  media  of  exchange. 
Evolution  of  induced  by  the  desire  to  avoid  the  risk  of  using 
media  of  the  Valuable  standard  metals,  like  silver  and 

exc  ange.  gold.  Came  in  addition  to  the  early  credit 
devices  such  as  bank-notes  and  bills  of  exchange,  the  most 
phenomenal  of  all,  the  use  of  bank-checks  drawn  on  de- 
posits, or  the  deposit-currency.  To  the  man  of  to-day  in 
Anglo-Saxon  countries  the  general  use  of  checks  for  all 
but  a  fraction  of  our  daily  transactions  is  so  familiar  as 
to  attract  no  attention;  and  yet  its  development,  through 
clearing-houses,  is  of  recent  date.  The  New  York  Clear- 
ing-House  was  established  only  in  1853;  and  in  many 
other  large  cities  in  later  decades.^  Banking  and  deposit- 
currency,  however,  are  but  practical  applicatioAS  of  the 
general  principles  of  credit.  The  significant  movement, 
of  which  the  rise  of  the  deposit-currency  is  but  a  part,  is 
the  rise  and  extension  of  credit.  Nothing  else  is  more 
characteristic  of  this  period. 

The  extension  of  credit — that  is,  the  transfer  of  goods 
under  obligation  to  return  an  equivalent  in  the  future — 
quite  apart  from  the  forms  (such  as  bills,  checks,  notes) 
arising  from  these  transfers,  is  a  special  char- 
creJt!*  acteristic  of  this  period.     Early  in  the  nine- 

teenth century  the  purchasing  power  of  a 
business  man  was  largely  confined  to  the  amount  of 
money  he  could  command;  but  the  rise  of  credit  increased 
the  available  purchasing  power  by  the  enormous  mass  of 

'  The  London  Clearing-House,  although  dating  back  to  1773,  kept  no  records 
prior  to  1840,  and  became  active  only  after  the  creation  of  the  one  in  New  York. 
Others  were  established  in  Boston  (1856),  Philadelphia  (1858),  Chicago  (1865), 
St.  Louis  (1868),  Osaka,  Japan  (1879),  Tokio  (1887).  On  the  Continent  the 
forms  of  credit  did  not  warrant  much  development  of  checks  and  clearing- 
houses, although  they  have  shown  some  growth  in  Germany  and  France.  In 
the  United  States  alone  there  are  170. 


THE  ECONOMIC  SITUATION  11 

staple  goods  bought  and  sold,  which  became  the  best  pos- 
sible basis  of  bank  assets.  Bankable  goods  became  sy- 
nonymous with  all  articles  having  a  liquid,  salable  quality. 
In  the  time  of  Ricardo  credit  had  little  place  in  the  eco- 
nomic world.  To-day  it  is  of  first  importance,  not  only  in 
all  private  transactions,  but  in  the  fiscal  operations  of  all 
governments,  while  its  influence  upon  prices  and  the  prin- 
ciples of  money  has  been  much  misunderstood.  Ricardo 
expressed  a  belief  that  prices  of  goods  depended  on  the 
quantity  of  money  in  circulation;  but  to-day  an  un- 
dreamed-of volume  of  goods  are  exchanged  by  forms  of 
credit  practically  without  the  intervention  of  any  money. 
For  instance,  in  the  United  States  alone  goods  to  the 
amount  of  $173,000,000,000  were  exchanged  by  the  use  of 
checks  in  one  year  (1913). 

Moreover,  the  growth  of  capital  directed  to  banking 
for  the  purpose  of  providing  credit  to  those  engaged  in 
producing  and  distributing  goods  has  gone  on  'pari  passu 
with  the  demands  of  an  enormously  increased  output  of 
goods.  But  the  increase  of  banking  power,  which  is 
synonymous  with  the  operations  of  credit,  is  not  to  be 
measured  by  the  amount  of  banking  capital  (and  surplus) 
but  by  the  credit  work  performed  by  that  capital,  that 
is,  by  the  growth  (in  Anglo-Saxon  lands)  of  deposits; 
smce  loans  result  directly  in  deposits,  and  the  relation- 
ship between  loans  and  deposits  is  close.  In  the  last 
thirty  years  the  deposit  item  of  our  national  banks,  which 
may  be  taken  as  fairly  representative  of  banking  and 
credit  development,  increased  from  1880  to  1910  by  534 
per  cent;  or  if  all  banks,  except  savings-banks,  be  taken, 
the  gain  has  been  754  per  cent.^ 

In  international  trade  the  bill  of  exchange  serves  as  a 
medium  of  exchange,  and  balances  only  are  paid  in  coin 

1  U:S.  statistical  Abstract,  1914,  p.  632. 


n  CREDIT  OF  THE  NATIONS 

or  bullion.  The  discovery  that  goods  (after  being  priced 
in  some  standard)  could  be  safely  bought  and  sold,  by 
credit  devices,  amounts  being  offset  against  each  other 
in  opposing  currents  of  domestic  and  foreign  trade,  with- 
out passing  money  from  hand  to  hand,  has  produced  a 
mechanism  of  flexibility  and  power,  rising  to  almost  in- 
credible achievements,  which  was  unknown  in  earlier 
decades.  As  we  proceed  in  our  study  of  the  European 
War  we  shall  begin  to  realize  the  wonder-working  ways 
of  credit. 

§  3.     Into  a  world  pulsing  with  the  life  of  these  new 

forces,  the  Bismarckian  German  Empire  issued  from  its 

Prussian  chrysalis  after  the  Franco-Prussian  War  of  1870- 

^  1871.     It  took  its  part  in  a  world-wide  move- 

Germany  in  ,  ^ 

a  world-wide    ment.     It  is  not  unnatural  that  an  exagger- 

movement.  ij  j  'x*  j.*         t  i 

ated  and  egoistic  nationalism  may  nave  as- 
cribed the  extent  and  speed  of  its  progress  largely  to  its 
own  internal  virtues,  and  have  given  little  heed  to  the 
world-wide  surge  of  new  forces  on  which  it,  as  well  as 
other  countries,  was  being  carried  to  unexpected  tri- 
umphs.^ Certain  it  is,  however,  that  its  characteristic 
virtues  and  discipline  helped  to  propel  its  craft  at  a 
greater  speed  on  the  swift-moving  current.  The  exact 
nature  and  trend  of  that  progress  throughout  this  re- 
markable period  just  before  the  European  War  is  neces- 
sary to  our  understanding  of  the  various  problems  be- 
fore us. 

Before  the  empire  the  German  race  was  scattered  in 
relatively  small  states  from  the  North  Sea  to  the  Danube. 

'  "The  German  people  .  .  .  have  broadened  all  the  conditions  of  their  life 
from  a  contracted  narrowness  to  an  undreamt-of  expansion;  and,  all  things  con- 
sidered, they  have  achieved  an  advancement  such  as,  compressed  within  so 
brief  a  time,  the  history  of  nations  can  hardly  parallel,"  says  Karl  Helfferich, 
in  Germany's  Economic  Progress  and  National  Wealth,  1888-1913  (1913),  p.  6. 


THE  ECONOMIC   SITUATION  13 

It  was  a  community  of  simple  ways,  chiefly  rural,  and  its 
manufactures  were  largely  hand-made.  In  Prussia,  in 
1804,  73  per  cent  of  the  population  were  engaged  in  rural 
occupations,  such  as  agriculture,  and  only  27 
per  cent  were  classed  as  urban;  while  more  Germany 
than  one-half  of  this  27  per  cent  were  con-  h^^craft 
nected  with  agriculture.  At  that  time  Prussia 
had  but  seventeen  cities  with  inhabitants  numbering 
over  10,000.^  A  people  with  little  adaptability,  the 
Germans  retained  these  rural  and  slow-changing  char- 
acteristics well  into  the  present  period.  The  significant 
mark  of  her  industry  was  the  prevalence  of  handicraft; 
machinery,  not  only  in  agriculture  but  in  her  limited 
sphere  of  manufactures,  was  undeveloped.  They  ex- 
ported foodstuffs  and  raw  materials,  and  imported  manu- 
factured products.  Germany  was  an  inland  country, 
with  little  or  no  transportation  by  canals  or  railways  be- 
tween the  various  disunited  German  states.  Her  devel- 
opment of  credit  and  banking  was  backward. 

Long  before  the  German  Empire  arose  England  had  de- 
veloped and  powerfully  extended  the  many  uses  of  steam 
and  machinery.     Long  before  Germany  existed  as  a  nation 
and  first  of  all  the  nations,  England  had  passed 
from  an  age  of  handicraft  to  an  age  of  machin-      gritein 
ery.     The  new  era  had  its  birth  on  British  soil.      first  in  the 
To  this  fact  is  to  be  attributed  the  prodigious      stage, 
growth  of  British  manufactures,  industry,  and 
commerce  in  the  nineteenth  century.     Before  other  peo- 
ples she  had  begun  to  supplement  her  labor  with  the  mani- 
fold productiveness  of  new  mechanical  forces.     If  other 
countries  later  also  turned  from  handicraft  to  mechanical 
methods,  in  imitation  of  and  stimulated  by  British  exam- 
ple, they  were  sure  to  make  startling  progress  in  their  trans- 

>  Cf.  Earl  D.  Howard,  Recent  Induslrial  Progress  of  Germany  (1907). 


14  CREDIT  OF  THE  NATIONS 

itional  period,  gaining  relatively  on  Great  Britain,  even 
though  not  outstripping  her.  British  progress  in  later  de- 
cades, while  continuous,  could  not  possibly  keep  up  the 
comparative  rate  of  her  own  early  transition  to  the  me- 
chanical stage.  As  contrasted  with  that  of  England,  the 
story  of  German  industrial  growth  is  that  of  an  energetic, 
industrious,  thrifty  people,  able  to  take  up  mechanical  de- 
_  vices  ready  to  their  hand,  already  perfected  in 

foUowed  other  countries,  and  thus  able  to  join  in  the 

°^^  *  amazing  conquests  of  this  era  of  new  forces. 
The  rate  of  her  early  progress  was  sure  to  be  spectacular, 
because  she  started  from  a  position  so  far  in  the  rear.  She 
has  not  inaugurated  a  new  era;  she  entered  into  the  new 
industrial  movement  which  had  started  before  her  birth. 
But  by  to-day  she  has  fully  changed  from  the  former 
handicraft,  agricultural  people  to  a  manufacturing,  export- 
ing, and  commercial  nation.  For  the  present  we  are  con- 
cerned not  with  her  political  and  militaristic  policy,  but 
with  the  facts  of  her  industrial  development. 

In  Chart  I  we  have  a  ready  means  of  measuring  the 
economic  progress  of  Germany  in  this  period,  not  only 
absolutely,  but  in  comparison  with  Great  Britain,  Rus- 
sia, France,  Austria-Hungary,  and  the  United  States. 
The  growth  of  population  alone  is,  of  course,  no  measure 
of  industrial  gain;  but  the  contrast  of  numbers  with  what 
numbers  can  do  is  striking  and  significant.  The  increase 
of  population  is,  as  was  to  be  expected,  greatest  in  Russia, 
followed  by  that  of  the  United  States,  both  having  had 
extensive  areas  of  agricultural,  forest,  and  mineral  re- 
sources to  be  exploited,  serving  as  a  stimulus  to  numbers. 
In  Great  Britain,  Austria-Hungary,  and  France,  popula- 
tion has  remained  nearly  stationary,  while  that  of  Ger- 
many has  gained  since  1880  about  51  per  cent. 


SCALE  OF,xPOPULATION 


SCALE  OF.  POPULATION 


THE  ECONOMIC  SITUATION  15 

But,  taking  up  the  imports  and  exports  of  goods  as  an 
indication  of  industrial  and  commercial  progress,  the 
contrasts  are  illuminating.  With  numbers  as  great  as 
those  of  Great  Britain,  Austria-Hungary  has 
made  little  commercial  gain.  Russia  with  the  progress  of 
greatest  growth  in  numbers  has  not  used  her       leading 

,  .  countnes. 

units  of  human  labor  to  commercial  advantage 
and  her  foreign  trade  has  been  sluggish;  even  France 
has  gained  more  than  either  Austria-Hungary  or  Russia. 
In  comparing  Germany  with  Great  Britain,  we  find  both 
have  greatly  extended  their  foreign  commerce,  with  the 
latter  still  in  the  lead;  but,  with  a  smaller  popula- 
tion than  Germany,  Great  Britain's  superior  control  of 
machine-made  processes  has  so  increased  the  power  of 
her  labor  in  this  era  of  new  forces  that  her  commerce^  is 
still  absolutely  larger  than  Germany's.  The  case  of  the 
United  States  is  suggestive,  if  only  for  the  reason  that  a 
rapid  increase  in  numbers  goes  hand  in  hand  with  a 
marked  gain  in  foreign  trade;  that  is,  the  agricultural 
regime  is  no  longer  the  main  source  of  commerce.  Al- 
though our  excess  of  exports  is  due  largely  to  grain,  cot- 
ton, and  extractive  products,  yet  in  these  industries 
labor  is  aided  by  machine  processes  and  by  the  new 
forces  probably  to  a  greater  extent  than  in  any  other 
country. 

Obviously,  even  though  the  movement  of  exports  and 
imports  is  indicative  of  internal  productivity,  foreign 
commerce  is  not  the  only  measure  of  industrial  growth. 

^  The  advantage  to  Great  Britain  in  imports  is  not  so  great  as  the  line  in  the 
chart  would  indicate,  because  it  is  not  possible  to  obtain  figures  throughout  the 
period  for  "special"  imports  (for  home  consumption).  The  British  line  of 
imports  gives  the  "general"  imports,  while  for  all  the  other  lines  the  figures  are 
"special."  For  instance,  [in  1910,  British  "special"  imports  are  $2,872,000 
against  $3,391,000  of  "general"  imports. 


16  CREDIT  OF  THE  NATIONS 

Of  course  there  could  be  no  foreign  trade  without  relative 
low  costs  and  special  efficiency  of  production  at  home. 
Germany's  internal  development,  therefore,  is  of  inter- 
est, not  only  because  of  its  fundamental  relation  to  her 
foreign  trade,  but  because  the  specific  industries  in  which 
she  has  most  excelled  throw  light  upon  the  causes  of  her 
remarkable  progress. 

Immediately  after  the  Franco-Prussian  War  there  was 
a  "boom"  period,  which  had  little  foundation  beyond  the 
elation  of  victory  and  the  receipt  of  the  French  indemnity. 
It  was  followed  by  a  collapse  which  lasted  for 
afteriSTo.  somc  fifteen  years,  or  until  about  1890.  The 
recovery  due  to  general  causes  happened  to 
coincide  roughly  with  the  beginning  (1888)  of  the  reign 
of  the  present  Kaiser,  and  allowed  good  courtiers  to  as- 
cribe the  change  to  his  personal  leadership. 

The  internal  industrial  development  of  Germany  has 

been,  of  course,  much  more  marked  even  than  her  foreign 

commerce.     While    remaining    an    agricultural    country, 

nearly  able  to  supply  her  own  consumption 

German  [^  normal  years,  the  marked  characteristic  of 

gains  in  both  .  . 

agriculture  her  industrial  progress  has  been  a  relative 
manufactures,  decline  in  agriculture  and  a  relative  rise  in 
manufactures.  Nevertheless,  it  must  be  kept 
in  mind  that  the  ruling  classes,  such  as  the  conservative 
landowners  of  the  east,  have  provided  a  highly  pro- 
tective tariff  for  agricultural  products,  the  advantages 
of  which  to  this  particular  interest  have  been  estimated 
at  about  $50,000,000  a  year.^  Moreover,  bureaucratic 
control  and  scientific  aids  to  soil  and  to  methods  of  cul- 
tivation have  made  the  productivity  of  her  land  greater 
per  acre  than  ever  before;  although  the  area  available 
for  agriculture  and  forestry  is  practically  incapable  of 

'  Cf.  E.  Crammond,  Journal  of  the  Royal  Statistical  Society,  July,  1914. 


THE  ECONOMIC  SITUATION 


17 


increase.^  In  spite  of  the  gains  due  to  greater  intensity 
of  cultivation,  and  the  added  efficiency  of  labor  through 
the  increased  use  of  agricultural  machinery,  the  manu- 
facturing interests  have  gained  far  more.  While  in  1882 
the  persons  engaged  in  agriculture  and  forestry  made  up 
42  per  cent  of  the  total  population,  the  percentage  in 
1907  was  only  28.5  (although  the  absolute  number  was 
17,681,200).  As  with  us,  the  tendency  to  move  from 
the  land  to  the  towns  was  an  inevitable  consequence  of 
the  urban  demand  for  factory  labor  in  connection  with 
the  new  mechanical  era.  In  1885  only  18.4  per  cent  of  the 
inhabitants  lived  in  towns  of  over  20,000,  but  in  1910 
the  proportion  was  34.5  per  cent.  As  in  the  United  States, 
and  for  the  same  reason,  the  increasing  urban  population 
brought  about  a  rising  demand  for  foodstuffs.  Instead 
of  exporting  foodstuffs  and  raw  materials  and  importing 
manufactures,  as  formerly,  Germany  now  felt  „ 
the  need  of  expanding  her  mechanical  indus-  exports 
tries  and  stimulating  her  exports  of  manufac- 
tured goods  in  order  to  pay  for  the  steadily  increasing 
imports  of  food,  which  had  risen  from  $241,375,000  in 
1887  to  $800,150,000  in  1912.  As  to  food,  in  spite  of  her 
intensive  cultivation,  she  was  no  longer  self-sufficing. 
Great  Britain  had  long  before  accepted  the  inevitable 
result  of  the  manufacturing  regime,  and  had  compara- 

'  Karl  Helfferich,  op.  cit.,  makes  the  following  comparison,  pp.  53-54: 


manufactures. 


Average  yield  per  hectare  (2.47  acres) 
ia  tons 


1883-1837 


Rye 

Wheat 

Summer  barley 

Potatoes 

Oats 

Hay 


1.00 
1.34 
1.28 

8.74 
1.13 

2.85 


1.78 
2.07 
2.01 
13.37 
1.90 
4.21 


18 


CREDIT  OF  THE  NATIONS 


Coal. 


lively  neglected  agricultural  pursuits,  so  that  in  1912  she 
produced  but  one-half  of  her  consumption  of  food.^ 
Hence  a  necessary  reliance  on  her  navy  in  case  of  war. 

Although  Germany  mines  salts,  lead,  zinc,  and  cop- 
per, the  basis  of  her  industrial  development,  as  well  as 
that  of  Great  Britain  and  of  the  United  States,  lay  in 
coal  and  iron.  In  the  production  of  coal  Ger- 
many now  holds  third  place  and  yields  about 
one-fifth  of  the  total  coal  production  of  the  world.^  The 
hard  coal  to  be  found  in  Rhenish  Westphalia,  upper  and 
lower  Silesia,  and  at  Saarbriicken,  is  practically  inex- 
haustible. Taking  mining  as  a  whole,  in  which  perhaps 
one-fifth  of  her  population  is  engaged,  there  has  been  an 
increase  in  the  value  of  her  annual  products  from  $175,- 
000,000  to  over  $400,000,000  in  twenty-five  years. 


^  The  aggregate  yields  of  typical  crops  in  other  countries  than  Great  Britain 
are  as  follows  (in  millions  of  tons) : 


Harvest  year 

Countries 

Wheat  and  rye 

Potatoes 

1912 

1912 

1912 

1912 

1911 
1911-1912 
1912-1913 

1912 

Russia 

42.6 

20.8 

15.9 

11.2 

10.4 

8.4 

6.4 

5.4 

36.9 
11.4 
50.2 
18.5 
11.5 

'2^2 

United  States 

Germany 

Austria-Hungary 

France 

British  India 

\rgentine 

Canada 

K.  Helfferich,  ibid.,  p.  55. 


2  The  relative  growth  of  the  leading  producers  of  coal  may  be  seen  as  follows 
(in  millions  of  tons) : 


Countries 


1886 


1911 


Percentage  of 
increase 


United  States  .  . . 

Great  Britain 

Germany 

Austria-Hungary . 

France 

Belgium 


103.1 
160.0 
73.7 
20.8 
19.9 
17.3 


450.2 

276.2 

234.5 

49.2 

39.3 

23.1 


336.6 

72.6 

218.1 

136.5 

97.5 

33.5 


THE   ECOXO:\nC   SITUATIOX  19 

German  iron  ores  contain  considerable  phosphorus,  and 
Httle  use  could  be  made  of  them  until  the  Gilchrist 
Thomas  process  was  applied,  in  1868;  but  from  1887  to 
1911  the  production  of  iron  ore  increased  three- 
fold. ^Moreover,  foreign  ores  were  also  im-  ^teei^^ 
ported,  and  in  the  same  period  the  production 
of  pig-iron  was  quadrupled,  so  that  now  Germany  ranks 
next  to  the  United  States  and  above  Great  Britain  (since 
1903)  in  this  industry.  She  holds  the  same  rank  in  the 
production  of  steel;  her  percentage  of  increase  since  1886 
being  even  l,3So  against  910.3  per  cent  of  gain  by  the 
United  States. 

For  the  manufacture  and  exportation  of  machinery, 
and  for  the  extraordinary  needs  of  the  electrical  indus- 
try, there  arose  a  great  increase  in  the  demand  for  iron 
and  steel  for  steel  rails,  bridges,  building  ma-      ,,   , . 

1        .,  .  Machinery. 

terials,  mmmg  machmery,  and  railway  equip- 
ment. Locomotives  were  sold  to  Russia;  while  it  is  esti- 
mated that  91  per  cent  of  the  electrical  railways  in  Europe 
were  built  by  Germans,  From  188^2  to  1907  the  persons 
employed  in  producmg  machinery  increased  by  '■229.1  per 
cent,  and  the  steam  power  by  557.7  per  cent.  It  is  to  be 
noted,  however,  that  in  this  field  Germans,  in  the  main, 
were  not  inventors,  but  adapters  of  the  improvements 
originated  by  others.  England  still  held  a  superiority  in 
textile  machinery,  and  the  United  States  in  agricultural 
implements. 

In  the  applications  of  science  to  the  chemical  and  beet- 
sugar  industries  characteristic  German  qualities  came 
into  play.  Bayer  in  1897  discovered  the  process  of 
making  artificial  indigo,  or  alizarine,  from  a 
coal-tar  product ;  and  German  chemists  super- 
seded organic  dyes  with  dyestuffs  from  coal-tar,  the  by- 
products of  gas  and  coke,  which  had  formerly  gone  to 


20  CREDIT  OF  THE  NATIONS 

waste.  When  the  war  broke  out  Germany  was  found  to 
have  furnished  the  main  supphes  of  these  dyes.  For 
this  industry  benzol  had  been  imported  from  England, 
Belgium,  and  Austria-Hungary.  Inasmuch  as  these  proc- 
esses were  closely  related  to  the  production  of  explosives 
there  was  a  reason  for  the  invasion  of  Belgium  in  obtain- 
ing control  of  its  coal  and  gas,  apart  from  its  furnishing 
an  easier  road  to  Paris  than  through  the  French  frontier. 
The  chemical  triumphs  in  developing  the  processes  of 
extracting  sugar  from  beets  are  primarily  German,  and 
she  leads  the  world  in  this  industry.  In  1911  Germany 
produced  2,701,000  tons  of  beet-sugar,  far  sur- 
passing Russia,  Austria-Hungary,  and  France. 
In  this  period  the  area  planted  to  sugar  beets  was  nearly 
quintupled,  the  total  quantity  of  sugar  increasing  over 
sevenfold,  and  the  weight  of  beets  to  make  one  kilogram 
of  sugar  being  reduced  from  11.62  (kilo.)  to  6.08. 

In  the  textile  industries  the  characteristic  lessons  of 
this  period  appear  in  striking  form.  Long  ago,  before 
the  Thirty  Years'  War,  the  Germans  had  produced  and 
exported  woollen  and  linen  goods,  but  were 
dependent  mainly  on  agricultural  occupations, 
such  as  the  growing  of  flax  and  the  raising  of  sheep.  Her 
reliance,  as  we  have  seen,  was  on  handicraft;  weaving  was 
done  at  home.  The  invention  of  the  steam-engine,  the 
spinning- jenny,  and  the  power-loom  in  England  in  the 
eighteenth  century  so  lowered  the  cost  of  producing  tex- 
tiles that  Germans  could  not  compete  with  the  English, 
the  efficiency  of  whose  labor  had  been  enormously  multi- 
plied by  the  use  of  new  power.  In  Germany  low  wages 
and  what  was  known  as  domestic  production  could  not 
hold  its  own  against  the  factory  system.  Yet  she  was 
late  in  changing  from  the  household  to  factory  methods. 
It  was  1860,  or  thirty  years  later  than  in  England,  before 


THE  ECONOMIC  SITUATION  21 

the  automatic  cotton-spindle  was  introduced  into  Saxony, 
where  cotton  goods  had  been  manufactured  by  machinery 
since  1798.  From  1882  to  1907  the  persons  employed  in 
textiles  (now  over  1,000,000)  have  increased  by  only 
20.3  per  cent,  and  the  steam-power  by  71.7.  Neverthe- 
less there  has  been  a  distinct  growth  in  the  exports  of 
these  goods  in  twenty-five  years.^  As  contrasted  with 
55,600,000  spindles  in  Great  Britain  in  1909,  Germany 
had  only  10,100,000;  and  while  Germany  exported  $121,- 
400,000  of  cotton  goods  in  1912,  Great  Britain  exported 
$611,100,000.  Similarly  British  exports  of  woollen  goods 
in  1912  were  $188,800,000,  but  German  were  only  $84,- 
400,000. 

Taking  German  manufacturing  industries  as  a  whole, 
Helfferich  estimates  that  in  the  past  twenty-five  years 
their  producing  capacity  has  increased  threefold.  In  this 
fact  we  find  the  raison  d'etre  for  the  remark-  Germany 
able  gain  in  German  commerce  and  shipping,  imports  raw 
For  permanent  international  trade,  goods  in 
the  main  must  be  exported  to  pay  for  imports.  As  Ger- 
many now  grows  little  wool,  and  no  cotton,  the  important 
items  in  her  foreign  trade  are  wool,  woollens,  cotton,  cot- 
ton goods,  as  well  as  iron  and  steel  and  machinery.  She 
has  imported  chiefly  from  Russia,  Great  Britain,  Austria- 
Hungary,  France,  India,  Argentine,  and  the  United  States 
(taking  our  cotton,  copper,  wheat,  petroleum,  corn,  lard, 
turpentine,  oil-cake,  etc.);  and  exported  chiefly  to  Rus- 
sia, Great  Britain,  Austria-Hungary,  France,  Belgium, 
Netherlands,  Switzerland,  and  the  United  States  (selling 

*  (Id  miUions) 
Cottons  from  $16.8  to  $105.4 

Woollens  from   44.4  to      63.5 

Silks  from     4.0  to      47.7 

Woollen  yarns  from      8.5  to      21.0 
Cotton  yarns    from     4.4  to      16.0 


22  CREDIT  OF  THE  NATIONS 

to  us  cotton  goods,  hosiery,  silks,  porcelains,  dyes,  toys, 
gloves,  etc!).^  From  1887  to  1912  her  imports  gained  by 
243.8  per  cent,  and  her  exports  by  185,4  per  cent.  As 
against  a  total  gain  in  foreign  trade  for  Germany  of  214.7 
per  cent,  that  of  Great  Britain  was  113,  of  the  United 
States  173.3,  and  of  France  98.1. 

As  a  consequence,  it  became  possible  to  expand  the 

German  mercantile  marine  two  and  a  half  times  since 

1888  to  about  4,400,000  tons  at  the  end  of  1912.     In  1911 

Germany  and  Great  Britain  together  did  39 

German  and  "^  ,  ,  ^ 

English  per  cent  of  the  world's  international  trade  (the 

shipping.  foi-iner  12.5  and  the  latter  26.9) ;  and  between 
them  they  owned  53  per  cent  of  the  world's  shipping.^ 
In  1880,  39.1  per  cent  of  German  sea-borne  trade  was  car- 
ried in  German  bottoms,  and  in  1911  50.4  per  cent.  In 
the  same  years  British  figures  dropped  from  72.2  per 
cent  to  59  per  cent.  It  is  significant  to  note,  also,  that 
in  the  tonnage  passing  through  the  Suez  Canal,  which 
was  under  English  control,  in  1892  that  owned  by  Great 
Britain  was  74.5  per  cent,  and  that  by  Germany  was  7.4 
per  cent;  but  in  1912  the  percentages  were  respectively 
62.9  and  15.1.  That  is,  under  the  freedom  of  the  seas, 
German  had  gained  at  the  expense  of  English  tonnage. 


^  In  1913,  of  a  total  for  Germany  of  $2,675,000,000  in  imports,  food  products, 
animals,  industrial  raw  materials,  and  semi-manufactured  goods  amounted  to 
$2,i275,000,000,  and  finished  goods  to  $400,000,000.  While  of  $2,225,000,000 
exports,  finished  goods  amounted  to  $1,450,000,000.     Helfferich,  op.  cit.,  p.  38. 

2  Mercantile  marine  of  leading  countries  (in  millions  of  tons) : 


1885 

1911 

Gheat  Britain 

7.4 
4.2 
1.2 
1.7 
1.3 

11.6 
4.6 
3.0 
1.5 
1.4 

United  States 

Germany 

Norway 

France 

THE  ECONOMIC  SITUATION  2S 

§  4.  Having  before  us  the  unmistakable  facts  as  to 
the  very  remarkable  economic  progress  of  Germany  in 
the  period  immediately  preceding  the  European  War,  we 
are  the  better  able,  by  virtue  of  the  direction  ^^^ 
and  characteristics  of  that  progress,  to  reach  Germany's 
a  conclusion  as  to  the  causes  underlying  it.  Progress. 
Indeed,  it  does  not  seenr  possible  to  go  far  wrong.  As  in 
most  studies  of  this  sort,  the  resultant  seems  to  be  the 
outcome  of  a  combination  of  more  than  one  set  of  forces. 

The  ruling  influence  in  this  case  is  undoubtedly  the  gen- 
eral industrial  revolution  which  ha^  caused  an  upheaval 
in  every  modern  nation.  The  transition  from  handicraft  to 
machinery,  the  discovery  and  application  of  new  mechan- 
ical forces,  would  alone  account  for  much  of  what  has  hap- 
pened. It  is  the  conspicuous  merit  of  Helfferich's  analysis 
of  this  period  that  he  has  emphasized  the  influence  of  the 
new  technic.  In  giving  the  increase  of  steam-power  in 
twenty-five  years  as  fourfold,  he  makes  this  statement:^ 

The  effective  capacity  of  one  mechanical  horse-power  can  be 
placed  at  about  the  equivalent  of  the  physical  labor  capacity 
of  ten  men.  Upon  this  basis  the  actual  work  done  by  German 
steam-engines  in  the  year  1907  was  equivalent  to  the  work 
done  by  52,000,000  men;  and  the  increase  of  actually  effective 
steam  horse-power  from  1895  to  1907  was  equivalent  to  an 
increase  of  the  working  population  by  about  28,000,000  men. 

Here  is  the  pivotal  matter:  the  growth  of  mere  numbers 
is  not  the  chief  thing,  it  is  the  union  of  workers  with  new 
forces,  which  enormously  increases  the  pro- 
duction of  goods  and  so  the  consumption  of  technfcT 
the  people.  This  is  the  fundamental  reason 
why  labor  depends  upon  the  capital  which  alone  can 
provide  the  new  technic. 

^  Loc.  cit.,  p.  23.  The  capacity  of  steam-engines  in  Prussia  increased  from 
1,222,000  horse-power  in  1882  to  2,358,000  in  1895,  and  to  5,190,000  in  1907. 


24  CREDIT  OF  THE  NATIONS 

In  the  use  of  gas  released  in  coking,  or  by  blast-fur- 
naces, for  generating  power  by  gas-engines;  in  the  use 
of  water-power  to  create  energy ;  in  reducing  peat,  lignite, 
^  .  etc.,  into  gas,  by  which  extensive  moors  were 

common  to       converted  into  a  source  of  new  power;  in  sav- 

all  countries.      •  •  i  i      j.      •      x  £ 

ing  ammonia  as  a  by-product;  in  transiorm- 
ing  the  gas  into  electric  energy,  so  that  by  power 
transmission  it  could  be  conveyed  to  industrial  centres, 
and  not  used  only  at  the  place  of  origin;  in  the  perfec- 
tion of  other  combustion  motors,  and  in  the  advantages 
of  cheap  land  and  water  transportation  for  her  goods, 
Germany  was  sharing  in  the  general  industrial  revolution 
going  on  in  all  countries.  Indeed,  as  was  said,  she  was 
unable  to  use  her  phosphorous  ores  until  an  American, 
Gilchrist  Thomas,  discovered  his  process.  For  gains  due 
to  forces  which  are  the  common  property  of  mankind  no 
special  credit  is  due  to  any  one  country  beyond  that  for 
intelligence  and  readiness  in  their  application  to  its  own 
problems. 

But  besides  making  great  strides  due  to  the  new  age  of 
progress,  how  much  did  Germany  accelerate  this  move- 
ment by  her  own  efforts  ?  Only  in  such  respects  has  she 
a  basis  for  national  self-complacency.  Characteristic  are 
the  precision  and  thoroughness,  the  economy  and  thrift, 
of  the  people  in  general.  As  a  consequence  there  is  little 
waste,  a  low  level  of  expenditure,  and  efficient  labor, 
which  together  ajfford  a  low  cost  of  production.  Her  re- 
sources in  coal  and  iron  are  made  available  chiefly  by  the 
low  costs  due  to  the  general  technical  gains  of  the  age, 
but  the  existence  of  these  deposits  at  home  furnishes  an 
individual  advantage  over  countries  without  them. 

In  the  scientific  development  of  the  principles  of  chem- 
istry and  their  application  to  her  industries,  Germany  has 
a  special  claim  to  credit.     These  gains,  moreover,  have 


THE  ECONOMIC  SITUATION  25 

extended  to  physics  and  electrical  theory.  It  is  claimed 
for  a  German,  Werner  von  Siemens,  that  his  invention  of 
the  dynamo  machine  and  the  dependence  of  _  .  . 
power  transmission  upon  it  was  the  basis  for  triumphs  in 
the  applications  of  electricity  in  strong-current  *^  ^°"^  ^' 
dynamics;  and  that  in  1891  the  first  successful  transmis- 
sion of  power  took  place  from  Lauffen  on  the  Neckar  to 
Frankfort  on  the  Main. 

Liebig's  work  in  vegetable  physiology  and  agricultural 
chemistry  have  been  distinctly  German;  but  only  more 
recently  have  the  processes  for  using  phosphoric  acid, 
potash,  and  nitrogen  to  increase  the  fertility  of 
the  soil  been  of  importance.  These  processes, 
however,  are  of  common  knowledge  and  freely  used  by 
other  countries.  Germany  has  no  monopoly  of  these 
advantages.  Her  special  progress  in  this  direction  is  due 
to  her  political  and  internal  organization,  and  to  her 
ability  to  enforce  good  methods  of  cultivation  upon  all 
growers  of  foodstuffs.  Still,  in  her  large  deposits  of 
potash,  she  has  a  special  advantage  over  other  nations. 
In  obtaining  nitrogen  from  the  air,  she  is  gaining  from  her 
individual  progress  in  using  electrical  power;  but  while 
earlier  in  this  field,  these  methods,  too,  are  common 
property,  as  well  as  the  access  to  Chilean  nitrates.  Here, 
again,  her  advantage  is  due  to  the  energetic  application 
of  general  knowledge  rather  than  to  her  own  inventive- 
ness. The  same  is  also  true  of  the  recovery  of  phosphor- 
ous slag  from  iron  (by  the  Gilchrist  Thomas  methods) 
and  its  use  in  the  form  of  phosphate  flour  as  an  artificial 
fertilizer. 

Again,  it  has  been  supposed  that  Germany's  marked 
industrial  progress  has  been  founded  on  a  singularly  effec- 
tive system  of  training  and  education.  In  reality  it  will 
be  found  that  her  commercial  schools  have  been  a  re- 


26  CREDIT  OF  THE  NATIONS 

suit  and  not  a  cause  of  her  commercial  success.  At  the 
present  time  there  is  no  question  as  to  the  superiority  of 
German  technical  and  commercial  schools;  and  the  com- 
mercial success  which  led  to  the  creation  of 
education.  ^^®  schools  has  Undoubtedly  been  accelerated 
by  their  work.  The  technical  high  schools 
are  intended  for  the  training  of  managers  and  experts 
in  the  fields  of  architecture,  structural  engineering,  me- 
chanical engineering,  electro-technics,  industrial  and  ad- 
ministrative engineering,  surveying  and  forestry,  prepara- 
tion for  which  is  supplied  by  the  lower  technical  schools, 
or  the  gymnasiums.  These  institutions  are  the  response 
to  the  new  world-wide  industrial  revolution.  For  artisans 
there  are  the  middle  and  lower  grade  and  special  schools 
in  which  are  taught  wood-carving,  pottery,  glass-mak- 
ing, drawing,  spinning,  brewing,  lace-making,  milling,  etc. 
Since  1887  the  gains  of  German  foreign  trade  and  the 
development  of  her  special  technical  and  commercial 
schools  have  gone  on  hand  in  hand.  It  seems  clear  that 
as  her  commercial  ambitions  expanded  the  aid  of  educa- 
tion for  material  and  commercial  purposes  was  sought 
for,  as  a  part  of  the  desire  to  penetrate  into  the  trade 
and  industry  of  other  nations.  The  first  German  com- 
mercial high  school,  that  of  Leipsic,  was  not  established 
until  1898. 

Without  doubt,  accuracy,  precision,  and  exact  knowl- 
edge have  been  stamped  upon  pupils;  but  there  is  a  ques- 
tion whether  the  system  has  not  produced  a  mechanical 
and  narrow  mind  lacking  in  flexibility.  In- 
nature  of  deed,  the  German  mind  has  a  tendency  to 
German  hcaviuess,    and   the   methods   enforced   from 

education.  ' 

above  lead  to  a  reliance  on  cut-and-dried 
rules  for  all  operations  so  that  there  is  no  premium 
on  initiative.     Outside  of  his  special  Fach^  the  German 


THE  ECONOMIC  SITUATION  27 

student  does  not  know  how  to  think  in  an  unexpected 
emergency,  as  does  an  American  student.  To  teach  what 
ought  to  be  beheved,  and  the  methods  by  which  certain 
pohcies  dictated  from  above  can  be  furthered,  does  not 
result  in  a  true  scientific  mind.  The  inability  of  German 
diplomacy  to  understand  the  springs  to  action  of  other 
peoples  seems  to  be  an  inevitable  result  of  the  too  me- 
chanical nature  of  German  education,  and  of  the  belief 
that  mere  energy  and  industry,  if  persisted  in  long  enough, 
can  produce  spiritual  results. 

Therefore,  in  studying  the  causes  to  which  her  amazing 
industrial  progress  is  due,  we  are  led  to  the  necessary 
conclusion  that  the  special  contribution  to  her  success 
which  is  essentially  German  is  her  genius  for 
efficient   organization.      Most   countries,   not   facmta^d 
realizing   the  full  meaning  of  the  industrial   centraUzation 

P  ,01  industry. 

revolution  and  the  need  of  enormous  capital 
investments  to  provide  the  new  technic  which  would 
magnify  the  productive  power  of  labor,  were  slow  to  ac- 
cept the  new  regime,  being  influenced  by  the  rising  tide 
of  agitation  which  claimed  for  labor  the  gains  in  produc- 
tion due  to  this  new  order.  The  necessity  of  large  pro- 
duction, of  consolidation  and  centralization  of  business,  in 
the  new  era  was  quickly  recognized  by  Germany.  From 
1882  to  1907  the  number  of  persons  engaged  in  small 
concerns  increased  only  one-fourth,  while  in  the  largest 
concerns  four-and-one-haK  fold.  Moreover,  the  various 
processes  of  production  were  centralized  under  one  head, 
not  only  in  industry  but  in  agriculture,  where  dairies, 
breweries,  sugar-factories  have  become  a  part  of  large 
establishments.  The  trade  combinations  have  taken  in 
coal-mines  and  iron-works.  In  Germany,  instead  of  ig- 
norant antagoid^m,  as  with  us,  there  has  been  intelligent 
supervision  and  co-operation  by  the  government  which 


28  CREDIT  OF  THE   NATIONS 

has  facilitated  industrial  organization  adapted  to  the  new 
methods.  Under  the  name  of  syndicates,  KartelSy  etc., 
there  have  been  developed  organizations  of  a  wide  range,^ 
including  similar  or  related  establishments — which  with 
us  are  regarded  as  criminal.  In  Germany,  however,  the 
constituent  companies  maintain  a  nominal  independence, 
but  enforce  agreements  as  to  production,  prices,  and  com- 
petition. The  state  approves  such  organizations  to  the 
end  that  there  may  be  more  and  cheaper  products  for  the 
consumption  of  the  people. 

More  than  this,   the  German  Government,  with  an 

assiduity  and  expert  aid  not  known  in  any  other  country, 

has  consciously  and  with  great  energy  and  skill  become 

the  ally  of  trade,  both  domestic  and  foreign. 

German  i-       .    .  .  , 

Government  It  mitiatcs  and  supports  new  enterprises; 
an  ally  of  owuiiig  the  railways,  it  grants  special  traffic 
rates  for  exports;  it  builds  canals  with  public 
funds,  in  order  that  industry  may  obtain  low  rates  on 
heavy  materials;  it  stimulates  and  subsidizes  interna- 
tional steamship-lines;  it  forces  the  development  of 
colonies;  it  has  helped  in  establishing  banks  for  foreign 
operations,  and  put  her  banking  resources  at  the  service 
of  foreign  trade;  it  bullies  other  states  to  gain  commercial 
privileges;  it  has  used  its  political  power  to  good  effect 
in  gaining  control  of  the  trade  in  southeastern  Europe 
and  Turkey;  it  employs  its  diplomatic  bod}^  the  prestige 
of  its  military  power,  all  the  pressure  of  the  government, 
to  control  ports,  obtain  concessions  for  opening  mines  and 
building  railways,  and  to  expand  its  commercial  influence 
in  other  lands.     How  well  Germany  has  succeeded  in  this 


'  The  Krupp  establishment  combines  coal-mines,  coking-plants,  iron-mines, 
smelting-works,  steel-working  (machines,  cannon,  munitions  of  war,  armor- 
plate),  electrical  works,  river  transports  for  coal  and  ore,  and  ocean-going 
vessels. 


THE  ECONOMIC  SITUATION  29 

policy  has  only  been  revealed  by  the  events  of  the  Euro- 
pean War. 

Germany's  remarkable  progress  from  1880  to  1910,  we 
must  then  conclude,  has  been  in  very  large  measure  due 
to  the  general  industrial  revolution,  which  she  did  not 
originate,  but  in  which  she  shared  with  all 
other  modern  nations.     The  rapidity  of  her      German 
progress  must  be  explained  by  the  relatively      quautiesfor 

—  ^   —         —  success* 

backward  position  from  which  she  started. 
When  the  opportunity  came  to  her  after  the  estab- 
lishment of  the  empire,  there  were  no  handicaps  ap- 
plied to  prevent  her  catching  up  with  her  competitors. 
But  to  opportunity  she  added  exceptional  qualities  of 
energy,  persistence,  training,  docility  under  bureaucratic 
rule,  thrift,  industry,  and  a  genius  for  organization.  To 
this  extent  she  deserves  no  little  credit  for  conscious 
effort,  but  in  the  main  she  was  only  one  of  the  legatees 
of  the  general  industrial  renaissance.  The  man  standing 
on  an  escalator  rises  from  no  effort  of  his  own;  but  if  he 
adds  his  own  force  by  also  walking  upward  on  the  moving 
steps,  he  proceeds  faster  relatively  to  stationary  objects. 
Such  seem  to  have  been  the  causes  of  her  progress. 

§  5.  The  outcome  of  her  industrial  development  has 
directly  affected  Germany's  foreign  policy.  The  pro- 
digious growth  of  her  productive  forces  at  home  has  made 
her  dependent  on  the  importation  of  raw  ma- 
terials to  be  worked  up  into  finished  goods;  markSs 
and,  in  turn,  made  it  necessary  to  maintain 
foreign  markets  for  her  finished  goods.  Therefore,  she 
has  come  to  regard  it  as  a  national  duty  to  "guarantee" 
a  supply  of  raw  products  through  the  possession  of  colo- 
nies. 

It  has  been  assumed  by  Germany — not  necessarily  on 


30  ,    CREDIT  OF  THE  NATIONS 

economic  but  largely  on  political  grounds — that  she  must 

own  the  territories  from  which  she  draws  her  materials, 

and  to  which  she  may  export.     Here  is  an 

Ownership  of  , .  i  •   i  .1  i     i       p 

markets  not  assumptiou  which  cauuot  DC  acccptcd;  tor 
necessary  to  j^  eannot  be  provcd  by  experience,  even  in 
German  trade.  Trade  does  not  follow  guns 
and  war-ships,  nor  arbitrary  governmental  decrees.  Clas- 
sical examples  of  the  success  of  the  carrying  trade  by 
unwarlike  nations  are  to  be  found  in  the  development 
of  shipping  in  Holland,  Norway,  and  Italy.  From  all 
time  nations  have  carried  on  trade  without  owning  the 
ports  or  territories  to  which  their  ships  go.  Indeed,  the 
old  time-honored  colonial  policy  of  Europe,  by  which 
colonies  were  used  as  a  means  of  aggrandizing  the  mother 
country,  has  long  ago  been  outlived  and  discredited,  be- 
cause it  was  crippling  the  normal  movement  of  goods. 
Goods  move  in  international  trade  on  the  economic  basis 
of  a  difference  in  comparative  costs.  We  send  the  goods 
in  which  we  have  a  relative  advantage,  and  with  them 
buy  the  goods  in  which  we  have  a  relative  disadvantage. 
It  is  an  economic  commonplace  to  say  that  this  is  the 
reason  for  the  very  existence  of  foreign  commerce. 

Moreover,  Germany's  silent  commercial  conquests  in 
the  trade  with  Russia,  England,  southeastern  Europe, 
South  America,  and  the  United  States  have  gone  on  vic- 
Q  ^^     toriously  in  territory  owned  in  some  cases  even 

British  trade  by  her  Hvals.  Her  commercial  penetration  of 
recipro  .  Russia  has  been  due  to  industrial  efficiency 
and  low  costs.  Before  the  war  both  English  and  Ger- 
mans had  built  factories  in  Russia  in  rivalry,  and  some- 
times in  collaboration.  In  regard  to  German  trade  with 
England  herself,  it  is  common  knowledge  that  English 
markets  were  flooded  with  German  goods,  so  that  "made 
in  Germany"  became  a  commercial  shibboleth.     In  short, 


THE  ECONOMIC  SITUATION  31 

British  companies  freely  carried  on  operations  in  Ger- 
many, and  German  companies  and  banks  were  established 
in  Great  Britain.  Trade  is  reciprocal,  and  these  rivals 
were  necessary  to  each  other.  In  1911  exports  from  Ger- 
many to  the  British  Empire  amounted  to  $360,725,000, 
and  the  goods  sent  by  the  latter  to  the  former  were  valued 
at  $442,475,000.  There  were  evidently  no  restrictions  on 
trade  beyond  those  set  by  protective  tariffs  and  relative 
advantages.  The  British  took  from  Germany  sugar, 
electrical  and  mining  machinery,  and  mechanical  products 
of  the  new  technic.  In  return,  they  sent  to  Germany 
products  of  the  older  technic,  in  which  the  British  re- 
tained their  superiority,  such  as  agricultural  and  textile 
machinery;  and,  in  addition,  raw  materials  to  be  used  in 
the  chemical  industries,  together  with  yarn,  wool,  hides, 
as  well  as  articles  of  luxury  and  fashion,  like  leather  goods, 
laces,  cloths,  plate  glass,  porcelain,  china,  best  grades  of 
paper,  etc.  Gradually  it  resulted  that  Germany,  as  she 
gained  industrially,  was  buying  less  from  England  and 
England  was  buying  more  from  Germany.  Again,  French 
and  German  bankers  were  freely  competing  in  Russia  and 
Turkey,  and  in  the  Balkan  States;  while  the  British  were 
aiding  the  Turkish  navy,  Germany  was  reorganizing  the 
Turkish  army.  How,  then,  could  it  be  said  that  Ger- 
many's trade  was  hindered  in  these  countries  ? 

Without  doubt,  something  more  than  the  economic 
gains  of  peace  entered  into  the  national  aspirations  of 
Germany.  If  the  conditions  before  the  war  brought  to 
her  the  greatest  progress  obtained  by  any 
other  country  in  the  last  thirty  years,  then  the  fhe^sta?  °^ 
retention  of  those  conditions  was  the  thing 
most  to  be  desired.  Her  phenomenal  commercial  gains 
were  in  themselves  proof  that  she  had  the  freedom  of  the 
seas.     How  else  could  her  foreign  trade  and  her  shipping 


32  CREDIT  OF  THE  NATIONS 

have  grown  so  amazingly?  The  facts  show  only  too 
clearly  that  she  had  the  freedom  of  the  seas,  and  the 
entry  of  her  goods  on  equal  terms  in  all  ports  of  the  world 
where  her  costs  allowed  her  to  undersell.  Equally  clear 
is  it  that  her  cry  for  the  "freedom  of  the  seas"  was  born 
of  a  plan  for  herself  so  to  control  the  seas  that,  when  war 
came,  she  would  be  dominant  on  the  ocean  as  well  as  on 
land.^  She  already  had  freedom  of  the  seas  for  peaceful 
commerce;  but  an  exaggerated  ambition  looked  to  domi- 
nance on  the  seas  in  time  of  war.  Such  appears  to  be 
the  only  possible  explanation  of  her  foreign  and  colonial 
policy. 

Obviously,  her  colonial  and  foreign  system  seems  to 

have  been  a  result  of  an  industrial  success  which  gave  her 

the  strength  to  aim  at  extensive  conquests  of  territory. 

This  affords  an  explanation  of  her  unwarranted 

German  .  „  .  . 

foreign  theory  that  possession  oi  territory  is  necessary 

ccm^equence  ^^  ^^®  cxpausion  of  trade.  But,  inasmuch  as 
of  success  in  her  development  came  late,  other  countries, 
especially  England,  had  been  before  her  in 
colonial  expansion.  A  naive  egotism,  swollen  by  un- 
dreamed-of commercial  success  for  a  country  relatively 
poor  in  wealth,  seemed  to  drive  her  to  anger  against  the 
one  country,  England,  which  had  led  the  way  in  the 
change  from  handicraft  to  machinery,  and  which  was  now 


^  "Germany — which  is  compelled  by  its  geographical  position  and  its  experi- 
ences in  history  to  maintain  a  land-army  equal  to  all  contingencies — had  also 
to  decide  to  protect  its  ever-growing  and  expanding  economic  relations  over 
the  seas  by  building  a  navy  strong  enough  to  nip  in  the  bud  any  temptation, 
on  the  part  of  any  enemy,  to  crush  our  economic  competition  by  force.  Our 
navy,  the  creation  of  our  Emperor,  is,  in  this  sense,  the  keystone  in  the  mighty 
system  to  which  is  due  the  extraordinary  development  of  wealth  in  Germany, 
and  which  to-day  constitutes  the  basis  for  the  existence  of  the  German  people." 
Helfferich,  p.  85.  The  power  to  develop  a  navy  has  been  a  consequence,  not  a 
cause,  of  the  industrial  development,  and  is  a  means  of  using  these  gains  for 
national  ambitions. 


THE  ECONOMIC   SITUATION  33 

found  to  have  been  established  in  the  most  productive 
colonies  throughout  the  world.  The  German  hatred  of 
England  is  born  of  commercial  rivalry.  It  is  the  childish 
naivete  which  believes  it  has  a  right  to  something  possessed 
by  another  simply  because  it  wants  it.  In  furtherance  of 
this  desire  was  a  concept  of  the  state  which  had  no  code 
of  morals,  and  to  which  everything  was  permitted  pro- 
vided it  achieved  success. 

Perhaps  the  German  point  of  view  can  in  no  way  be 
more  clearly  or  authoritatively  stated  than  in  the  follow- 
ing words  of  Helfferich: 

Our  dependence  upon  foreign  countries,  the  counterpart  to 
the  great  advantages  derived  by  us  from  having  taken  our 
place  in  world-economy,  calls  for  stronger  counterpoises.  Such 
a  counterpoise  can  be  created  by  German  enterprise  and  Ger- 
man capital  establishing  a  field  for  their  activity  beyond  the 
borders  of  our  country,  and  thereby  gaining  a  direct  influence 
over  foreign  territories  that  may  be  important  to  us  as  sources 
of  supply  and  as  markets.  This  can  be  done  in  an  effectual 
way  by  acquiring  over-sea  colonial  possessions;  for  in  such  case 
economic  influence  is  secured  and  strengthened  in  the  most 
effective  manner  possible  by  political  domination.  In  so  far, 
however,  as  this  way  is  limited  or  barred  up  altogether — for 
when  Germany,  after  the  restoration  of  its  political  power, 
first  cast  its  eyes  over  the  seas,  it  found  unfortunately  that 
the  colonial  world  was  already  for  the  most  part  occupied — our 
end  must  be  reached  by  means  of  a  far-sighted  financial  and 
economic  activity  (p.  81). 

The  war  has  disclosed  the  true  meaning  of  many  inno- 
cent words  in  ante  bellum  literature.  The  plan  of  a  com- 
mercial organization  over  Mitteleuropa  strengthened  by 
strong  political  ties  enforced  by  Germany  lies  behind 
such  exposition  as  this: 

Their  [German  merchants  in  other  countries]  commercial, 
manufacturing,  and  agricultural  undertakings,  although  rooted 


34  CREDIT  OF  THE  NATIONS 

in  a  foreign  soil,  are  an  important  support  for  Germany's  posi- 
tion in  the  world's  business.     This    is   especially  true  of  the 
works  of  civilization  on  the  grandest  scale  which 
German  German  enterprise  and  German  capital  have  cre- 

penetration.  ^ted  in  the  course  of  the  past  few  decades  in  non- 
European  countries:  the  great  electrical  undertak- 
ings, irrigation  systems,  and  especially  railways,  which — like  the 
Bagdad  Railway  and  the  Shantung  Railway — open  up  anew 
under  German  direction  extensive  regions  and  develop  them 
into  sources  of  supply  for  our  import  trade  and  into  markets 
for  ourexports.     Ibid.,  p.  84. 

The  claim  often  made  that  Germany  had  need  of  new 
territories,  because  her  increasing  population  had  no  room 
at  home  is  belied  by  the  facts.  The  rise  of  the  new 
technic  had  caused  a  demand  for  additional  industrial 
workers,  and  has  stopped  emigration;  since,  like  England, 
a  small  area  can  retain  a  very  large  manufacturing  popu- 
lation, if  their  imported  food  can  be  bought  by  the  ex- 
port of  finished  products.  It  seems  evident  that  ambi- 
tious expansion  has  not  been  due  to  lack  of  room  for  her 
people  at  home,  but  rather  that,  because  of  great  indus- 
trial gains,  national  conquests  have  been  rendered  pos- 
sible. 

§  6.  Having  before  us  the  facts  of  Germany's  remark- 
able and  rapid  industrial  development  since  1880,  the 
coincidence  of  the  organization  of  the  empire  with  the 
beginning  of  the  greatest  industrial  revolution  in  history, 
and  the  general  and  special  causes  at  work  to  produce 
this  advance,  we  are  next  led  to  study  their  influence  on 
the  direct  causes  of  the  war. 

One  patent  fact  stands  out  above  all  others:  in  the 
teeth  of  competition  with  the  richest,  most  experienced 
commercial  countries,  with  those  longest  intrenched  in 
successful  trade,  Germany,  in  the  three  decades  before 


THE  ECONOMIC  SITUATION  35 

the  war,  made  greater  strides  in  production  and  com- 
merce than  any  other  modern  nation.  If  so,  why  was  she 
not  content?  If  she  really  believed  England  to  be  de- 
cadent, to  be  rotting  in  gross  materialism;  German 
that  France  had  lost  her  fibre  and  was  given  ascendancy 
over  to  political  degeneracy — then  why  not  let  ^  °"  ^"* 
them  go  on  in  their  fatuous  course,  dead  to  all  efficiency, 
while  she  was  rising  every  day  to  new  commercial  vic- 
tories, even  in  French  and  British  markets.  In  spite  of 
clear  warnings  and  explicit  accounts  of  the  methods  by 
which  Germans  were  successfully  absorbing  the  world's 
markets,  French  manufacturers  and  exporters  refused  to 
wake  up.  Why  not  let  them  remain  asleep,  while  reaping 
the  triumphs  of  peaceful  industry  ? 

If  Germany  wished  the  entry  of  her  ships  into  all  the 
ports  of  the  world,  the  very  facts  of  her  advance  in  foreign 
trade  and  tonnage  show  beyond  the  shadow  of  a  doubt 
that  she  achieved  that  end  in  times  of  peace.  The  "free- 
dom of  the  seas"  was  hers  in  fact  and  in  deed,  without 
owning  the  ports  into  which  she  sailed  on  equal  terms 
with  Norwegians,  Italians,  or  British.  She  had  no  sum- 
mons to  war  to  gain  what  she  already  possessed. 

She  had  succeeded  in  a  most  remarkable  commercial 
competition  by  reason  of  the  national  qualities  of  energy, 
foresight,  persistence,  efficiency,  and  a  genius  for  organi- 
zation. Her  government,  moreover,  took  on  g^^^ 
paternalistic  powers,  assuming  direct  over-  socialism  in 
sight  of  the  physical,  moral,  and  intellectual  ^rmany. 
effectiveness  of  the  individual;  and  German  docility  under 
autocratic  direction  acquiesced.  There  resulted  the  great- 
est example  ever  known  of  state  socialism,  or  manage- 
ment of  industry  and  the  acts  of  individuals  by  the  state, 
but  headed  by  an  absolute  government  of  a  personal 
Kaiser  in  which  the  proletariat  had  no  voice.     It  was  a 


36  CREDIT  OF  THE   NATIONS 

government  by  autocratic  experts,  whose  high  efficiency 
presents  a  telling  argument  in  favor  of  the  absolutism  un- 
der which  it  flourished,  and  thus  formed  a  strong  bulwark 
for  the  reigning  dynasty  in  an  age  in  which  the  demands  of 
the  proletariat  for  an  increasing  share  in  the  government 
were  steadily  advancing.  The  weakened  republican  gov- 
ernment of  France  stood  out  in  bold  contrast  to  the 
forceful  and  efficient  absolutism  of  Germany.  Then,  why 
did  Germany  not  let  well  enough  alone.'' 

In  truth,  we  are  forced  to  find  some  other  cause  for  the 
war  than  the  chance  for  industrial  development.  With- 
out doubt  it  was  the  exceptional  growth  of  industrial 

power  and  efficiency  which  fed  and  gave  op- 
^'ulr^^ota  portunity  for  a  colossal  national  ambition- 
cause,  of  Since  the  Franco-Prussian  War  of  1870,  one 
power.  would  be  indeed  blind  not  to  see  everywhere 

in  Germany  evidences  of  a  "swelled  head,"  of 
a  "feverish  megalomania."  With  the  new  wealth  there 
came  extravagance  and  the  vulgar  enjoyment  of  riches 
by  the  parvenu,  unused  to  the  refinements  of  life.  The 
increased  national  production  gave  the  means  for  spend- 
ing more  funds  on  the  army  and  navy.  Militarism  had 
no  direct  influence  in  furthering  industrial  efficiency  be- 
yond emphasizing  the  national  qualities  of  docility,  obedi- 
ence, and  promptness.  Extended  militarism  was  a  result, 
not  a  cause,  of  the  increase  of  productive  power;  because, 
if  the  national  ambition  were  to  be  carried  out  by  con- 
quest, it  was  the  new  wealth  that  gave  militarism  its 
chance.  It  was  the  spirit  which  guided  the  use  of  the 
new  wealth,  and  which  lay  in  the  mind  of  absolutism, 
that  determined  the  action  of  Germany  and  the  direction 
of  its  dream  of  power.  When  Germans  speak  of  a  war 
for  "national  existence,"  for  "a  place  in  the  sun,"  they 
mean  the  use  of  war  to  permit  the  realization  of  their 


THE  ECONOMIC  SITUATION  37 

colossal  ambition  to  be  a  world-power  whose  will  cannot 
be  limited  by  the  military — or  naval — power  of  any 
other  one  country  or  of  any  group  of  allied  countries. 
When  they  demand  "the  freedom  of  the  seas,"  they  mean 
such  control  of  the  seas  by  a  German  navy  that  in  time 
of  war  no  other  country  can  stop  her  commercial  marine 
from  sailing  the  seas.  Their  growth  as  a  marvellously 
successful  commercial  country  was  only  a  means  to 
a  militaristic  end. 

We  are  thus  inevitably  led  face  to  face  with  Russia 
and  southeastern  Europe.  The  geographical  position  of 
Germany  precluded  much  progress  to  the  north  or  west; 
her  hope  of  conquest  lay  to  the  southeast 
through  Austria-Hungary,  the  Balkan  States,  cause  of 
Constantinople,  Turkey  in  Asia,  Mesopotamia,  wlT^""^^** 
and  the  Persian  Gulf.  The  colossal  dream  of 
Mitteleuropa  gives  the  key  to  her  Russian  policy.  If 
Russia  were  allowed  to  build  up  friendly  Balkan  States, 
strengthen  Serbia,  handicap  Austria-Hungary,  and  throw 
her  huge  bulk  across  the  way  to  the  Persian  Gulf  by 
attaining  Constantinople,  Germany's  ambition  was  de- 
stroyed. The  Sarajevo  assassination  was  only  a  lucky 
pretext  for  action  in  1914,  intended  for  the  year  before. 
German  diplomacy  emphasized  the  desire  to  "localize" 
the  conflict  between  Austria  and  Serbia;  always  provided 
the  German  purpose  through  Austria-Hungary  to  prevent 
Russian  domination  in  the  Balkans  was  accomplished. 
When  Russian  mobilization  in  support  of  Serbia  began, 
it  was  directed  against  Austria-Hungary.  In  reality  it 
was  a  move  against  the  German  dream  of  Mitteleuropa. 
When  Germany  made  Austria-Hungary's  cause  her  own, 
and  demanded  the  demobilization  of  Russia,  the  real  issue 
was  joined,  and  the  struggle  transferred  from  Serbia  to 
Russia,  with  the  consequence  of  a  general  European  war 


38  CREDIT  OF  THE  NATIONS 

to  decide  the  power  of  Germany  to  rule  Europe,  and 
thereafter  the  world.  If  Germany  were  to  conquer, 
Great  Britain  would  be  taken  in  hand  separately;  so  she 
was  forced  to  join  the  Allies.  If  the  Allies  should  be 
beaten,  the  United  States  would  later  be  separately  forced 
to  accept  German  dictation,  of  which  we  were  given  a 
taste  by  their  submarine  warfare.  So  we  were  of  necessity 
obliged  to  join  the  Allies.  The  problem  for  the  world 
was  whether  the  dream  of  German  absolutism  should  be 
realized  by  the  conquest  over  free  peoples.  It  is  mere 
deception  to  speak  as  if  Germany  had  been  deprived  of 
the  chance  for  unlimited  industrial  and  commercial 
growth  in  times  of  peace,  and  that  she  had  to  go  to  war 
for  the  right  to  legitimate  economic  development. 


CHAPTER  II 
WAR  AND  CREDIT 

Nature  of  credit — Relation  of  money  to  credit — Relation  of  credit  to 
wealth  and  capital — Credit  drawn  in  terms  of  money — Credit  and 
fiscal  policy — Unnecessary  consumption — The  surplus  of  society — 
Destruction  by  waste — Destruction  of  capital  in  war — Loss  of 
labor  force — Economic  exhaustion  of  surplus — Financial  mobiliza- 
tion— Credit  based  on  average  productive  power — Surplus  greater 
than  supposed — Case  of  a  nation  cut  off  from  outside  borrowing — 
Functions  of  credit  during  war — How  demand  obligations  are  met. 

§  1.  When  Lord  Kitchener  based  the  success  of  the 
Allies  In  the  European  War  on  "men,  munitions,  and 
money,"  obviously  he  used  the  term  "money"  in  the 
sense  of  credit.  Out  of  every  five  dollars  spent  at  least 
four  dollars  is  obtained  by  credit.  Since  more  than 
$100,000,000,000  has  already  been  spent  by  European 
Powers  on  the  war,  it  is  clear  not  only  that  no  such  sum 
of  money  was  in  existence,  but  also  that  war  has  not  de- 
stroyed actual  money.  For  instance,  there  is  even  more 
gold  in  the  world  to-day  than  before  the  war;  and  cer- 
tainly there  is  much  more  paper  money.  In  brief,  it  is 
wealth,  or  goods,  in  some  form  which  has  been  de- 
stroyed; and  it  is  only  the  prices  of  these  goods  expressed 
in  money  which  count  up  into  the  enormous  totals.  These 
goods  were  priced  in  some  monetary  standard,  like  gold; 
and  some  money  may  have  been  used  in  the  exchanging 
of  the  goods  from  seller  to  buyer;  but  it  was  the  modern 
credit  system  which  made  the  use  of  much  money  in  this 
process  of  exchange  quite  unnecessary. 

39 


40  CREDIT  OF  THE  NATIONS 

The  important  thing  to  a  coiintry's  prosperity  is  not 

the   amount   of    money  nor  ci   a  medium  of  exchange 

which  it  has  within  its  borders,  but  the  volume  of  goods 

it   has   which   satisfy   wants.     It   is   not   the 

Goods  are        tickets   by   which   the   milkman   counts,   but 

primary ;  «^  ' 

money  and  the  number  of  quarts  of  milk,  which  are  pri- 
secondary.  mary.  In  foreign  trade,  likewise,  the  matter 
of  chief  importance  is  not  the  quantity  of 
bills  of  exchange,  but  the  actual  production  and  move- 
ment of  grain,  cotton,  munitions,  and  the  like,  in  ex- 
ports or  imports.  Only  because  of  the  movement  of 
such  goods,  or  of  securities  (which  are  titles  to  goods 
and  property)  do  bills  of  exchange  come  into  existence. 
That  is,  want-satisfying  goods  are  primary;  money  and 
forms  of  credit  are  secondary.  Goods  underlie  all  legiti- 
mate and  continuing  credit  operations.  When  saying  in 
general  terms  that  credit  is  based  upon  goods,  it  is  under- 
stood, of  course,  that  it  is  concerned  not  only  with  goods 
actually  in  existence  now  being  exchanged,  but  also  with 
goods  coming  forward  day  by  day,  in  the  steady  opera- 
tions of  established  industries,  as  well  as  with  securities 
of  various  kinds,  which  are  in  fact  titles  to  goods  or  to 
going  concerns  engaged  in  providing  economic  services.^ 
Money,  gold,  checks,  the  various  media  of  exchange,  are 
only  convenient  devices  for  expediting  essential  transac- 
tions in  goods.  Although  credit  is  itself  an  exchange  of 
goods  involving  the  return  of  an  equivalent  in  the  future, 
the  forms  of  credit  arising  out  of  such  transactions  are  va- 
rious— book  accounts,  bills  receivable,  notes,  checks,  bills 
of  exchange,  and  the  like.     Some  forms  of  credit — such 


^  "  Credit  depends  on  the  assumption  that  goods  produced  will  come  to  mar- 
ket and  be  sold  and  that  securities  that  are  based  on  the  earning  power  of  pro- 
duction will  fetch  a  price  on  the  exchanges  of  the  world."  Hartley  Withers, 
War  and  Lombard  Street,  p.  4. 


WAR  AND  CREDIT  41 

as  checks  or  bills  of  exchange — also  serve  as  media  of 
exchange,  if  made  payable  on  demand  by  recognized  in- 
stitutions, and  thus  perform  some  of  the  work  of  money. 

The  funds  needed  on  the  unexampled  scale  of  modern 
wars  can  be  obtained  either  by  taxation  or  by  loans. 
Obviously  taxation,  even  as  heavy  as  that  now  levied  by 
Great  Britain,  can  provide  only  a  part  of  the  ^^  ^^^ 
great  sums  consumed  by  this  war.  Therefore,  carried  on 
the  main  reliance  of  all  the  belligerents  must  ^"^ 
be  on  loans,  that  is,  on  the  use  of  credit.  When  it  is 
asked,  "Where  does  all  the  money  come  from  to  carry 
on  this  stupendous  war.'*"  it  will  readily  appear  in  answer 
that  the  cost  of  war  is  largely  represented  by  the  destruc- 
tion of  goods,  referable  to  money  only  as  a  means  of  re- 
cording their  value,  and  that  money  plays  a  role  second- 
ary to  goods.  It  is  the  quantity  of  goods  demanded  by 
war  which  forms  the  real  economic  expense  of  this  terrible 
struggle.  Money  remains;  goods  are  destroyed.  The 
war  is  really  being  carried  on  by  credit. 

To  obtain  credit  is  to  gain  possession  of  purchasing 
power  over  goods.  If  credit  is  given,  there  is  very  little 
difficulty  in  finding  a  medium  of  exchange  by  which  the 
purchasing  power  can  be  exercised  in  any  direc- 
tion needed.  Hence,  the  really  important  ITSve^n.^** 
problems  in  financing  a  war  have  to  do  with  the 
extent,  soundness,  and  maintenance  of  a  country's  credit. 
How,  then,  does  any  individual,  company,  or  government 
obtain  this  purchasing  power  inherent  in  credit  .^^  Of 
course  it  can  be  given  only  by  persons  who  have  control 
over  goods,  or  by  institutions  which  deal  in  credit  transac- 
tions, that  is,  by  banks.  Banks  are  created  by  those 
who  invest  capital,  not  in  farming  or  mining,  but  in  the 
business  of  supplying  credit,  or  purchasing  power,  to  those 
who  apply  for  it.     To  an  individual  applicant  why  should 


42  CREDIT  OF  THE  NATIONS 

credit  be  given?  Only  if  evidence  can  be  given  that  he 
will  repay  at  the  future  time  agreed  upon.  The  possession 
of  wealth,  continuous  producing  power  in  a  going  in- 
dustry, a  reputation  for  integrity  and  keeping  a  promise, 
the  pledge  of  securities  which  are  titles  to  wealth  or  con- 
trol of  sources  from  which  wealth  can  be  drawn  at  call, 
are  accepted  as  sufficient  guarantees  for  the  certainty  of 
repayment.  The  varying  legal  forms  of  credit  arise  from 
varying  agreements  between  the  contracting  parties  as 
to  the  certainty  and  method  of  securing  repayment. 
What  is  true  of  the  individual  is  true  of  the  state.  An 
individual  may  get  goods  on  a  book  credit  at  a  shop, 
or  by  giving  a  promissory  note  to  a  bank,  or  by  the 
creation  of  a  bill,  or  acceptance;  in  the  case  of  the 
state,  by  giving  a  short-time  obligation  or  by  giving 
a  national  bond,  engaging  to  pay  interest  from  year 
to  year  and  the  principal  at  some  future  date.  In  all 
borrowing  there  is  a  case  of  simple  buying  and  selling, 
as  in  any  shop ;  the  lender  sells  the  right  to  draw  on  him 
at  once,  and  the  borrower  gives  in  return  the  obligation 
to  pay  a  definite  sum  in  the  future.  A  bank  sells  a  de- 
mand right,  and  buys  the  right  to  payment  in  the  future. 
The  borrower  gets  immediate  purchasing  power;  the  bank 
does  the  waiting,  and  takes  the  risks  involved  in  it.  The 
phenomenal  development  of  modern  credit  is  due  to  the 
recognition  that  giving  present  purchasing  power  on  a 
guarantee  of  future  repayment  can,  with  experience  and 
good  judgment,  be  carried  on  with  practical  safety;  and 
the  extension  of  the  field  of  credit  has  gone  j>ari  passu 
with  the  enlargement  in  the  production  and  exchange  of 
goods.  In  the  main  the  obligations  are  paid  off,  if  goods 
are  steadily  and  normally  produced  and  sold.  There  is 
a  vast  difference,  however,  between  commercial  credits 
at  a  bank,  where  the  term  of  the  loan  is  short  (such  as 


WAR  AND   CREDIT  43 

ninety  days),  and  an  investment  in  a  national  bond  run- 
ning often  many  years  to  maturity.  Commercial  banks, 
therefore,  have  constantly  liquid  assets,  by  which  they 
can  meet  all  demand  claims;  but  demand  liabilities  can- 
not be  met  by  assets  consisting  of  long-term  bonds. 
When  a  state  borrows,  the  source  of  the  means 
of  repayment  exists  not  only  in  the  total  borrows 
wealth  of  its  people,  but  also  in  the  skill  and  eoo^s,  not 

•  .  .  .        money. 

judgment  with  which  the  state  derives  its 
national  income  from  that  wealth  by  taxation.  The 
ability  of  a  government  to  borrow  and  to  obtain  enor- 
mous sums  of  purchasing  power  over  goods  needed  in 
war  thus  depends  not  only  on  the  wealth  of  the  country, 
but  also  upon  its  sound  finance  and  the  skilled  mobiliza- 
tion of  its  resources.  A  country  having  vast  natural  re- 
sources, like  Russia,  may  not  borrow  as  effectively  and 
cheaply  as  a  poorer  country  which  is  financially  better 
organized. 

In  obtaining  credit  a  state  must  act  as  a  borrower. 
Just  as  in  private  borrowing,  the  applicant  wishes  imme- 
diate means  of  payment,  while  the  lender  is  to  be  repaid 
onlv  in  the  future.     Therefore,  for  all  sums  be-    .,    ^ , 

"  '  ^  Must  borrow 

yond  those  that  can  be  raised  by  taxation,  the  of  its 
state  must  go,  in  the  main,  to  the  private 
credit  organizations  of  the  people  to  get  that  present 
purchasing  power  which  is  the  urgent  need.  There  is 
thus  brought  to  light  the  fact  that  the  power  to  lend  is 
not  a  creation  of  the  state,  but  is  a  result  of  the  slow 
accretion  of  capital  and  surplus  wealth  in  the  hands  of 
individuals  and  institutions  of  credit.  The  ability  to  get 
quick  purchasing  power  by  the  government  on  an  enor- 
mous scale,  therefore,  depends  on  the  credit  power  of  its 
citizens,  or  those  of  friendly  countries.  It  cannot  buy 
munitions  and  supplies  unless  it  can  transmute  its  future 


44  CREDIT  OF  THE   NATIONS 

production,  by  credit  operations,  into  present  means  of 
payment.  If  present  goods  are  not  obtainable,  it  cannot 
keep  men  in  the  field. 

§  2.  Credit  does  not  create  capital.  Capital  functions 
as  economic  goods  given  over  mainly  to  productive  uses, 
and  originates  through  saving.  To  give  credit  or  pur- 
chasing power  over  goods  does  not  increase 
capital.*^  goods,  except  by  making  capital  more  active 
and  by  increasing  its  efficiency  in  production 
through  enabling  it  to  go  where  it  may  be  most  needed. 
Credit  gives  capital  mobility. 

More  than  that,  credit  widens  the  exchangeable  power 
of  wealth.  All  salable,  liquid  wealth  becomes  a  basis  for 
granting  commercial  credit,  and  itself  becomes  a  source  of 
purchasing  power  to  its  owner,  independent  of 
wealth  into  the  quantity  of  money  he  holds.  Credit  coins 
purchasing  ^^jj  g^^Q]^  wealth  iuto  purchasing  power;  and, 
when  expressed  in  terms  of  standard  money, 
the  dealings  seem  to  the  superficial  observer  to  be  trans- 
actions in  money  when  in  truth  they  consist  of  transac- 
tions in  goods.  For  instance,  the  demand  deposits  of 
commercial  banks  are  not,  as  supposed,  the  outcome  of 
money  deposited,  but  chiefly  the  credits  granted  to  bor- 
rowers based  on  paper  arising  from  the  sale  of  goods.  In 
other  words,  all  bankable  property  enters  the  circulatory 
movement  of  goods  which  are  being  exchanged  against 
each  other,  with  only  a  minimum  use  of  money  for  bank 
reserves,  or  for  small  change.  Thus  credit,  individual  or 
national,  enables  the  borrower  to  obtain  immediate  means 
of  payment,  and  postpones  to  the  future  its  repayment. 
The  state,  which  borrows  usually  on  long  time  for  its 
permanent  debt,  pledges  its  future  producing  power  in 
return  for  present  purchasing  power  over  goods. 


WAR  AND  CREDIT  45 

If  anything  like  war  intervenes  to  disturb,  or  to  cut  ofiF, 
the  normal  production  of  goods,  on  which  forms  of  credit 
are  based,  the  whole  fabric  of  credit,  exchange,  and  pay- 
ments is  directly  affected,  even  though  no  _^  ^.  .  , 
money  is  destroyed.  Credit  operations,  though  on  goods,  not 
based  upon  the  movement  of  goods,  are,  as  °°™°°®y* 
we  have  said,  always  drawn  in  terms  of  money  and  give 
the  impression  that  the  dealings  are  in  money.  Before 
the  war  began  the  enormous  exports  of  Great  Britain 
would  normally  be  paid  for  by  imports  of  various  sorts; 
but  the  outbreak  of  war  suddenly  stopped  the  movement 
of  goods.  That  is,  obligations  due  to  the  British  could 
not  be  liquidated  by  the  proceeds  arising  from  the  sale 
of  goods.  Hence,  there  was  the  call  for  that  amount  of 
money  {i.  e.,  gold)  which  expressed  the  value  of  the 
goods  sold.  Then,  it  was  discovered,  with  seeming  aston- 
ishment, but  with  a  certainty  which  should  have  been 
expected,  that  actual  money  equal  to  the  credit  transac- 
tions in  goods  could  not  be  had.  Thus  was  enforced  the 
truth  that  credit  is  really  based  on  goods,  and  not  on 
money;  and  that  the  final  liquidation  of  these  pre-war 
obligations  must  wait  on  a  later  production  and  move- 
ment of  goods.  Issues  of  paper  money  do  not  repair  the 
stoppage  of  production,  because  the  subtraction  of  goods 
is  the  pivotal  matter,  and  printed  slips  of  paper  are  not 
substitutes  for  goods  demanded  by  consumers. 

In  trying  to  understand  the  credit  operations  of  this 
stupendous  war,  in  which  we  are  now  involved,  it  is  nec- 
essary to  keep  in  mind  the  distinctions  between  money, 
credit,  and  capital,  and  the  difference  in  their 
functions.  In  the  actual  operations  involved  credit, 'and 
in  financing  the  war  we  shall  have  to  discrimi-       fiscal 

°  .  operations. 

nate  between  those  affecting  (1)  money,   (2) 

credit  and  banking  (which  is  only  the  practical  applica- 


46  CREDIT   OF  THE   NATIONS 

tion  of  the  principles  of  credit),  and  (3)  fiscal  policy,  cov- 
ering the  operations  of  the  state  in  taxation,  borrowing, 
and  expenditure — although,  as  we  shall  see,  one  of  these 
may  react  on  the  others.  The  play  of  credit  is  subtle, 
and  affects  both  the  others. 

§  3.  Credit,  being  directly  related  to  the  production 
and  exchange  of  goods,  is  therefore  directly  affected  by 
the  volume  of  bankable  goods  destroyed  in  war.  In  fact, 
the  power  of  a  belligerent  to  continue  fighting  depends 
not  only  on  its  own  productive  power,  but  also  on  its 
ability  to  obtain  purchasing  power  by  credit  from  others. 
It  becomes,  then,  a  question  of  having  surplus  goods  over 
and  above  the  necessaries  of  life. 

In  studying  the  destruction  of  war,  moreover,  we  must 
not  omit  to  compare  it  with  a  similar  destruction  which 
has  been  going  on  in  times  of  peace  through  the  wastes 
of  extravagance  and  vanity.  To  most  people  this 
saying  is  a  block  of  stumbling  and  offense.  We  have 
become  so  accustomed  to  the  use  of  luxuries  and 
unnecessary  articles  that  when  they  are  withdrawn  in 
a  sudden  emergency  we  are  apt  to  regard  their  sub- 
.  traction  as  a  great  disaster.     And  yet  very 

consumption  little  of  our  daily  consumption  is  really  essen- 
super  uous.  ^j^j  ^^  health.  Indeed,  all  that  large  part  of 
it  which  is  not  needed  for  the  actual  maintenance  of  the 
body  in  full  health  is  superfluous.  Only  the  primary 
satisfactions — those  for  healthful  food,  clothing,  and 
shelter — are  really  essential  to  physical  well-being.  Men 
leave  the  fat  and  stuffed  living  of  the  city  to  spend  some 
summer  months  camping  in  the  woods,  where  they  have 
the  simplest  cuisine,  the  slightest  shelter,  and  the  rough- 
est clothing,  and  yet  they  emerge  restored  in  strength  and 
animal  spirits.     If  we  stop  to  think,  it  must  be  obvious 


WAR  AND   CREDIT  47 

to  us  that  we  could  give  up  the  largest  part  of  our  habit- 
ual peace  consumption  and  not  only  maintain  but  even 
improve  our  physical  condition. 

The  whole  history  of  a  growing  and  diversified  consump- 
tion is  a  story  of  the  development  of  human  wants.  Not 
content  with  the  satisfaction  of  the  primary  needs  of 
simple  food,  clothing,  and  shelter,  men  have 
enlarged  and  differentiated  their  wants  with- 
out limit  as  civilization  has  spread  and  brought  new  de- 
sires. Not  being  mere  animals,  and  not  content  with 
mere  physical  requirements,  they  have  developed  endless 
wants  of  an  aesthetic,  pleasure-giving,  intellectual,  and 
spiritual  character.  There  being  no  limit  to  human 
wants,  their  satisfaction  is  limited  only  by  the  power  of 
society  to  produce  the  concrete  articles  and  yield  the  ser- 
vices which  meet  these  wants.  The  productive  power 
of  society  is  dependent  on  division  of  labor,  natural  re- 
sources, intelligent  management,  racial  adaptability  to 
industry,  eflScient  labor,  invention,  the  spread  of  mechani- 
cal methods,  and  an  abundance  of  capital  to  allow  "round- 
about" productive  operations.  Nevertheless,  it  remains 
true  that  for  a  considerable  period  of  time  we  could,  in  a 
great  emergency,  go  without  all  but  the  primary  needs  of 
life;  while  it  remains  equally  true  that  to-day  the  most 
considerable  part  of  our  productive  forces  are  normally 
engaged  in  giving  forth  satisfactions  beyond  those  for  our 
primary  needs. 

The  accumulated  capital  of  the  race,  working  with  its 
laboring  force,  is  occupied  in  producing  objects  of  de- 
sire, the  largest  part  of  which  enter  into  the  surplus  of 
society  in  excess  of  the  minimum  as  above 
described.  If,  therefore,  labor  and  capital  ^^a*vagance, 
formerly  engaged  in  producing  unnecessaries 
cease  to  work,  society  will  have  no  stocks  of  this  kind 


48  CREDIT  OF  THE  NATIONS 

of  goods  which  they  can  buy;  or,  if  the  owners  of  wealth 
withdraw  their  demand  for  unnecessaries,  either  because 
of  some  common  wave  of  sentiment,  or  of  alarm  for  the 
future,  or  of  a  sudden  desire  to  save,  or  of  a  loss  of  income, 
this  labor  and  capital  will  not  be  employed  in  producing 
them.  It  must  be  clear,  then,  that  a  vast  consumption 
goes  on  in  times  of  peace,  in  return  for  which  no  new 
goods  are  produced;  that  is,  tangible  goods  are  destroyed, 
without  resulting  in  subsequent  production.  While  laces, 
wines,  or  food  are  used  up  by  those  who  consume  them 
for  personal  pleasure  or  luxury,  wealth  to  that  amount  is 
lost  just  as  certainly  as  if  they  were  war  goods  destroyed 
on  the  battle-line.  In  the  latter  case  there  are  no  per- 
sonal desires  satisfied;  only  a  loss  without  any  compen- 
sations but  the  supposed  gains  of  war.  If  A  produced 
100  units  of  goods  at  an  outlay  of  80,  and  B  did  the  same 
in  other  goods,  then  if  A's  goods  were  exchanged  against 
B's,  they  went  to  consumers,  and  satisfied  desires  (of  all 
kinds,  some  harmless,  some  lofty,  some  vulgar),  even  if 
these  goods  were  not  used  to  hire  workmen  to  produce 
other  and  new  goods.  Looked  at  from  a  purely  economic 
point  of  view,  we  cannot  regard  the  enormous  destruction 
of  wealth  in  war  as  something  very  different  from  what  has 
been  going  on  in  peaceful  days,  through  unproductive 
consumption.  The  purposes  of  the  consumption  (being 
for  civilized  ends  as  against  the  killing  of  men)  may  be 
widely  different;  but  the  economic,  material  result  may 
not  be  so  very  different.  Were  the  destruction  of  war 
accompanied  at  the  same  time  by  a  really  effective  ces- 
sation of  unproductive  civilian  consumption,  a  country 
might  emerge  from  the  war  almost  intact  in  an  economic 
sense — having  lost,  of  course,  the  satisfactions  from  the 
gains  of  art  and  luxury.  These  are  the  reasons  why 
statesmen,  during  the  strain  of  great  expenditure  in  war. 


WAR  AND  CREDIT  49 

urge  upon  their  people  the  need  of  economy,  or  the  cessa- 
tion of  unnecessary  consumption. 

§  4.  The  destruction  in  war,  however,  goes  further 
and  deeper  than  the  loss  by  unproductive  consumption 
during  peace.  It  involves  the  whole  philosophy  of  con- 
sumption, into  which  we  cannot  here  go;  but  certain  con- 
siderations of  destruction  and  credit  are  essential  to  our 
purpose. 

The  disappearance  of  wealth  in  the  European  War,  we 
all  know,  is  going  on  to  a  frightful  extent.  It,  of  course, 
reduces  the  margin  from  which  savings  can  be  made  and 
from  which  capital  is  created.  Great  as  is  the 
destruction  of  wealth,  however,  it  is  not  so  between  loss 
vital  as  the  destruction  of  capital.     The  de-   oj  wealth  and 

....  ot  capital. 

struction  of  wealth,  hurtful  as  it  is,  is  like  the 
loss  of  a  farmer's  yearly  crop  of  apples;  he  may  get  on 
without  apples  until  the  next  season.  On  the  other  hand, 
the  destruction  of  capital,  since  it  is  one  of  the  factors 
devoted  to  the  production  of  new  wealth,  is  like  the  en- 
tire loss  of  the  apple-tree  itself;  the  farmer  can  never 
again  have  apples  of  his  own  until  a  new  tree  has  been 
grown.  It  is  important,  therefore,  to  know  whether  it  is 
wealth  or  capital  which  is  being  destroyed  in  this  war. 
In  order  even  to  be  maintained  without  diminution, 
capital,  which  in  active  production  is  constantly  changing 
its  form  and  being  restored  in  new  goods,  must  be  re- 
placed. A,  in  producing  100  units  of  goods,  expended, 
perhaps,  80  units  of  capital.  A  producer,  B,  in  another 
field  will  have  done  likewise.  A  and  B,  typifying  all 
producers,  exchange  their  finished  goods  with  each  other. 
When  A  gets  back  in  exchange  the  proceeds  of  100  units 
of  new  goods,  he  must  set  aside  80  out  of  his  gross  returns 
to  replace  the  80  units  of  capital  used  up  in  the  produc- 


50  CREDIT  OF  THE  NATIONS 

tion  of  his  original  100.  If  so,  his  capital  is  restored  and 
he  can  go  on  producing  another  100  in  the  future.  So 
with  B.  The  replacement  of  80  in  each  case  is  essential 
to  the  mere  maintenance  of  capital  and  industry  on  its 
present  scale,  without  any  increase. 

The  characteristic  effect  of  war  upon  industry  in  each 
of  the  belligerent  countries  has  been  the  violent  and  sud- 
den transfer  of  labor  and  capital  on  a  phenomenal  scale 
_  ^  from  peaceful  occupations  to  those  producing 

destroys  war  Supplies.     Labor    and   capital    were    di- 

"^^^^    '  verted  from  making  peaceful   buildings,  fac- 

tories, machinery,  canals,  merchant- vessels,  docks,  to  mak- 
ing guns,  shells,  and  equipment — which,  when  consumed, 
vanished,  without  return.  If  A  transfers  his  capital  from 
normal  industry  to  manufacturing  munitions  of  war,  his 
outlay  of  80  yields  100  in  goods  sold  to  the  government, 
which,  as  we  have  seen,  destroys  them  without  reproduc- 
ing anything  in  their  place.  The  government,  unlike  B 
(in  times  of  peace),  does  not  return  goods  to  A  by  which 
he  can  replace  his  80  units  of  capital  and  thereby  go  on 
producing  in  the  future.  That  is,  when  shells  explode 
on  the  firing-line,  A's  100  units  of  product,  and  so  the 
equivalent  of  his  80  of  capital,  are  destroyed  forever.  A 
is  able,  in  fact,  to  go  on  producing,  because  in  return 
for  his  100  units  the  government  gives  him  purchasing 
power  in  a  promise  to  pay — either  paper  money,  or 
treasury  notes,  or  long-term  bonds — which  are  forms  of 
credit  based  upon  future  production  after  the  war.  But, 
quite  apart  from  the  external  means  of  payment,  the 
sinister  fact  emerges  that  capital  has  been  destroyed  and 
not  replaced.  We  cannot  get  away  from  the  unmistak- 
able reduction  in  the  capital  of  the  country.  This  is 
basic  to  our  study  of  war  and  credit. 

More  direct  losses   occur   when,  as  in  the  retreat  of 


Loss  of  goods 
removes 


WAR  AND   CREDIT  51 

the  Germans  on  the  Somme  front,  there  is  a  thorough 
destruction  of  cattle,  crops,  fruit-trees,  forests,  lumber, 
tools,  rolling-stock,  factories,  mines  (as  at 
Lens),  houses,  and  even  of  the  soil  itself  under 
high  explosives  on  the  battle-field.  Not  only  J^^^j^"^ 
are  existing  goods  reduced,  but  there  is  lost 
also  the  capital  by  which  future  goods  can  be  produced. 
Hence,  not  only  circulating  but  even  more  or  less  fixed 
capital  has  been  destroyed  in  the  territory  occupied  by 
an  enemy,  as  in  Belgium,  northeastern  France,  East 
Prussia,  Serbia,  and  Rumania.  The  basis  of  credit  is  to 
that  extent  undermined.  As  soon  as  there  is  no  com- 
modity basis  behind  credit  operations,  bankruptcy — or 
an  inability  to  meet  demand  obligations  at  any  instant — 
is  not  far  off.  The  total  of  goods  produced  and  exchanged 
by  a  belligerent  forms  the  basis  for  its  credit;  but  if,  by 
the  necessary  results  of  war,  the  productive  power  of  the 
people  and  its  surplus  above  the  necessaries  of  life  are 
reduced,  that  country's  credit  is  fro  tanto  weakened. 
Only  if  a  nation  can  go  outside  its  boundaries  to  neutrals 
or  to  friendly  allies,  where  it  can  borrow  the  goods  of 
others  to  fill  up  its  own  present  losses,  can  its  status  be 
maintained  intact.  When,  as  in  the  case  of  the  Cen- 
tral Powers,  credit  must  be  limited  by  the  productive 
power  at  home,  the  basis  of  credit  is  directly  undermined 
in  proportion  as  the  destruction  of  war  goes  on.^  To  say 
that  debts  which  are  a  measure  of  losses  are  an  advan- 
tage if  confined  to  its  own  people,  is  only  self-deception. 

^  If  Doctor  Karl  HelfiFerich  is  correctly  quoted  in  his  budget  speech  of  De- 
cember 14,  1915,  we  have  an  amazing  example  of  poor  logic  and  economics  in 
the  following:  "We  are  paying  almost  exclusively  to  ourselves,  while  the  enemy 
is  paying  abroad.  Therein  lies  the  guaranty  that  in  the  future  we  shall  main- 
tain the  advantage.  .  .  .  [Germany]  can  bear  to  become  poorer  and  always 
remain  what  she  is."  She  certainly  cannot  maintain  her  production  and  credit 
under  constant  destruction  without  replacement  from  outside  while  the  war 
lasts.     What  may  happen  in  the  decades  after  the  war  is  quite  another  matter. 


52  CREDIT  OF  THE  NATIONS 

The  most  serious  blow  at  production  and  credit  by  war, 
however,  is  given  by  the  killing  and  maiming  of  its  labor- 
ing force.     Capital  and  wealth  can  be  again  restored  by 

economic  processes,  but  not  so  human  life  or 
loss  of^ men.     Perfect  limbs  and  eyes.     How  far  the  directing 

and  managerial  skill  has  disappeared  cannot 
yet  be  estimated.  The  immediate  effect  has  been  dimin- 
ished production  of  all  goods  but  war  supplies;  and  to 
that  extent  the  loss  of  labor  force  has  lowered  the  basic 
support  of  credit.  In  the  Central  Empires  scarcity  of 
labor  has  weakened  the  efficiency  of  railway  transporta- 
tion, reduced  the  output  of  coal,  and  diminished  the  pro- 
duction from  the  soil — except  such  as  can  be  continued 
by  prisoners,  women,  boys,  and  old  men.  Nevertheless, 
in  less  than  a  generation,  under  the  ordinary  stimulus  to 
increase  of  numbers,  we  may  expect  to  see  the  full  labor 
force  again  restored.  In  an  even  shorter  time  the  losses 
to  capital  will  have  been  made  good,  and  probably  the 
unusual  stimulus  to  thrift  after  the  war  will  have  even  en- 
larged the  world's  capital,  and  so  the  production  of  goods 
on  which  credit  depends. 

§  5.  In  view  of  the  colossal  expenditures  in  this  war, 
it  had  been  thought  that  it  could  not  long  continue  be- 
fore economic  exhaustion  would  be  reached.  In  spite  of 
unparalleled  losses  of  wealth,  capital,  and  men, 
e:^austion.  however,  the  struggle  has  gone  on  into  the 
fourth  year  of  the  war.  Evidently  solvency, 
in  the  ordinary  business  sense,  is  no  more  obligatory  to 
the  continuance  of  war  by  a  belligerent  than  in  the  case 
of  a  bankrupt  railway  which  continues  to  fight  its  solvent 
rivals;  in  each  case  they  are  relieved  from  meeting  their 
immediate  fixed  charges  out  of  normal  income.  By  what 
processes,  then,  does  a  country  at  war  meet  its  enor- 


WAR  AND  CREDIT  53 

mous  expenditures?  Obviously  not  by  money,  but  by 
credit.  The  limit  to  expenditure  is  to  be  found  not  merely 
in  the  surplus  of  goods  over  necessaries  capable  of  being 
produced  by  a  country,  but  also  in  its  power  to  borrow 
from  the  surpluses  of  other  countries.  The  limit  to  credit 
is  ultimately  in  goods,  home  or  foreign.  A  government 
does  not  borrow  money,  but  purchasing  power  over  goods; 
because  the  value  of  these  goods  is  expressed  in  money, 
and  the  totals  of  loans  are  also  thus  expressed,  it  does  not 
change  the  basic  fact  that  it  is  goods  which  are  really 
borrowed. 

Economic  inconvenience  is  reached  when  there  is  an 
interruption    to    the    normal    consumption    of    civilians. 
There  is,  of  course,  a  falling  off  in   the  production  of 
articles  formerly   in   demand.     There  is  evi- 
dence of  prosperity  in  war  industries,  because  ©n  to  the 
by  expending  borrowed  funds  for  war  supplies  "°"*  °^ 

•^         ^  °  ,  ,  5^  surplus  goods. 

the  government  causes  a  forcible  diversion  of 
demand  into  new  directions  where  there  is,  also,  a  stimu- 
lated demand  for  labor  (which  quickly  reduces  unemploy- 
ment) .  This  inevitable  reduction  of  civilian  consumption 
does  not,  however,  affect  the  ability  of  a  country  to  con- 
tinue the  war.  As  yet  it  is  only  an  inconvenience.  The 
habitual  coffee-drinker  may  not  be  able  always  to  have 
coffee  for  breakfast;  many  may  have  to  give  up  butter  or 
jam  on  their  bread;  constant  meat-eaters  may  be  very 
largely  cut  off  from  meat;  the  woman  of  society  may  not 
only  fail  to  get  the  same  color  effects  in  her  dress,  but 
may  even  be  cut  off  from  buying  new  clothes;  the  heavy 
income  tax  may  cut  off  wine  and  force  a  large  reduction 
in  servants;  but  the  war  will  not  thereby  be  stopped.  So 
far  as  non-combatants  are  concerned,  the  war  can  go  on 
as  long  as  they,  and  the  laboring  classes  in  particular, 
can   satisfy   only   their   primary   wants.     That   is,   eco- 


54  CREDIT  OF  THE  NATIONS 

nomic  exhaustion  is  reached  only  when  the  surplus  of 
production  over  the  necessaries  of  life  has  been  wiped 
out  by  turning  the  efforts  of  industry  into  making  war 
supplies. 

So  far  our  analysis  has  been  directed  to  the  basic  mat- 
ters of  the  production  and  consumption  of  goods.  These 
fundamental  considerations,  however,  are  usually  hidden 
Financin  by  ^^^^  sight,  because  attention  is  popularly 
issues  of  given  to  the  external  phenomena  of  money 
^*^^''  and  finance.     To  many  minds  the  possibility 

of  continuing  the  war — apart  from  men  and  munitions — 
seems  to  pivot  upon  the  ability  to  "finance"  their  in- 
creasing expenditures.  What  does  financing  in  this  sense 
mean  ?  Obviously  it  is  a  series  of  credit  operations  arising 
out  of  loans  and  their  use  in  obtaining  war  supplies.  .  On 
the  surface  it  is  a  question  whether  the  government  can 
pay  for  its  extraordinary  war  expenditure.  In  providing 
a  superficial  means  of  payment  there  is  a  wide  scope  for 
deception  of  the  people  if  there  can  be  created  notes  and 
promises  to  pay,  even  though  there  is  behind  them  a  di- 
minishing basis  of  goods  to  be  got  by  taxation,  or  by 
means  of  loans.  Any  state  can  get  sound  means  of  paj^- 
ment  only  from  the  wealth  or  goods  owned  by  its  own 
citizens,  and  turned  over  to  the  state,  or  by  loans  in 
foreign  countries  which  gives  it  control  over  goods  there. 
Water  cannot  rise  higher  than  its  source;  nor  can  a  nation 
spend  more  than  the  wealth  or  goods  it  can  obtain  by  taxa- 
tion or  by  borrowing  on  credit.  The  amount  of  bank- 
notes, or  paper  money,  it  may  issue,  or  the  billions  of 
bonds  it  may  sell,  does  not  increase  its  wealth  one  whit. 
On  the  contrary,  they  are  evidences  of  the  burden  of  debt 
incurred. 

Successful  financial  mobilization  consists  in  meeting 
extraordinary  war  expenditures  by  a  means  of  payment 


WAR  AND   CREDIT  55 

acceptable  at  a  given  point  of  time  to  the  sellers  of  goods. 
Taxes  and  loans  on  a  large  scale  are  turned  over  to  the 
Treasury  mainly  in  claims  to  deposits  in  banks;  and  the 
Treasury  is  able  to  pay  by  transferring  these 
claims  to  its  creditors.     In  view  of  the  enor-    ^"^^"<^'?'  ^^ 

economic 

mous  transactions  carried  through  by  credit  exhaustion 
and  banking  devices  in  the  exchanging  of  synonymous, 
goods,  no  great  addition,  if  any,  to  the  quan- 
tity of  money  in  circulation  in  ordinary  times  is  needed 
simply  for  a  medium  of  exchange  in  aiding  the  trans- 
fer of  goods  in  war  time.  Hence,  not  only  must  a  bel- 
ligerent have  wealth  as  a  basis  for  credit,  but  it  must  have 
the  skill  to  marshal  these  resources  in  the  form  of  accept- 
able means  of  payment  at  the  time  and  place  required  in 
order  to  cover  its  expenditures  as  the  war  goes  on.  Con- 
sequently, there  may  be  a  difference  between  financial 
exhaustion  and  economic  exhaustion;  for  a  country  with 
large  resources  badly  mobilized  may  be  financially  crip- 
pled, and  yet  not  be  economically  exhausted  in  its  sur- 
plus of  goods.  In  the  American  Civil  War  the  Northern 
States  were  often  financially  bankrupt,  yet  their  economic 
resources  were  not  exhausted;  the  South  yielded  not  be- 
cause of  financial  mismanagement,  but  because  of  its 
economic  exhaustion.  Likewise  a  country  like  Russia, 
under  the  rule  of  the  Romanoffs,  having  immense  poten- 
tial resources,  may  by  corruption,  dishonesty,  or  ineffi- 
ciency have  become  financially  weak,  because  her  vast 
resources  were  not  turned  into  satisfactory  means  of  pay- 
ment. For  this  reason  Russia  has  had  difficulty  in  pay- 
ing for  its  foreign  purchases,  and  has  been  early  aided  by 
English  credit.  Her  food  supplies  are  indefinitely  large, 
and  her  men  and  goods  might  furnish  a  long-continued 
power  for  fighting — provided  she  gets  the  munitions 
and  credit  and  wishes  to  fight.     To  be  decisive,  finan- 


56  CREDIT  OF  THE  NATIONS 

cial  exhaustion  must  be  reducible  to  economic  exhaus- 
tion. 

Under  skilful  financial  mobilization  of  resources,  as  in 
Germany,  the  end  might  come — other  things  being  equal 
— only  when  the  surplus  above  necessaries  has  been  ex- 
r.     .  ^  t..       hausted;  if  there  should  not  be  enough  food  for 

Great  debts  '  ,     .    .,.  i  i  i 

wiu  not  alone    both  soldiers  and  civilians,  there  would  be  evi- 
e  war.     ^gjj^g  ^j^^^l^  j-j^g  jjj^g  ^f  ncccssaries  had  been 

passed.  Nor  will  war  cease  merely  because  of  the  piling  up 
of  enormous  debts.  So  long  as  a  belligerent  can  obtain  the 
men  and  the  munitions,  it  is  solely  a  question  of  credit. 
The  big  debts  and  the  heavy  burdens  of  taxation  for  the 
future  entailed  by  them  are  problems  bearing  on  the  fu- 
ture resources  and  productivity  of  the  country.  The  crea- 
tion of  loans  puts  a  mortgage  on  the  future,  with  the  aim 
of  obtaining  present  means  of  payment  for  war  supplies  to 
be  consumed  to-day.  The  only  real  limit  to  these  long- 
term  credits  is  the  ability  to  get  present  goods;  when  this 
fails,  the  object  of  borrowing  disappears.  For  these  pro- 
digious loans  subscribers  pay  in  to  the  government  forms 
of  money,  or  mainly  bank  credits,  based  on  the  possession 
of  goods  or  property  (often  in  the  shape  of  other  invest- 
ments). An  equivalent  destruction  of  goods  in  war  sup- 
plies has  gone  on  pari  passu.  At  the  end  of  the  war  the 
credit  obligations  involve  the  return  by  the  state  of  nearly 
all  it  has  destroyed — but  this  can  be  taken,  apart  from 
the  interest  for  carrying  the  burden  of  debt,  only  grad- 
ually during  many  decades  from  the  production  of  the  fu- 
ture. 

§  6.  It  had  been  supposed  that  the  destruction  in  the 
European  War  would  reduce  the  purchasing  power  of  Eu- 
rope and  cut  off  the  demand  for  American  goods.  As  ev- 
ery one  now  knows,  these  fears  at  the  outbreak  of  the  war 


WAR  AND  CREDIT  57 

were  unjustified,  and  there  has  arisen  an  unprecedented 
demand  from  belligerent  countries  for  our  foodstuffs, 
machinery,  copper,  horses,  and  all  kinds  of  war  supplies. 
While  the  demand  for  cotton,  mainly  from  the  Central 
Powers,  has  fallen  off,  yet  the  excess  of  our  various  ex- 
ports has  risen  to  undreamed-of  figures.  How  can  these 
goods  be  paid  for  ?  If  not  by  actual  gold,  then  payment 
must  be  made  either  by  present  goods,  or — which  is  the 
important  matter — ^by  credit  operations  involving  future 
goods.  '  This  last  is  the  central  matter. 

In  estimating  the  purchasing  power  of  a  country  it 
must  be  treated  as  a  going  concern;  that  is,  its  output  of 
products  for  general  use  and  for  export  may  be  strikingly 
reduced  in  the  years  of  war.     But  war  condi- 

p  ,  111^  country's 

tions  are,  lortunately,  not  normal;  and  de-  credit 
struction,  while  unparalleled,  must  be  rela-  nomwj^  °° 
tively  temporary.  Therefore,  the  outlook  in  productive 
exceptional  years  of  war  must  be  corrected, 
for  purposes  of  estimating  the  basis  of  credit,  by  refer- 
ence to  a  country's  normal  productive  power  under  aver- 
age conditions.  \Thus  the  purchasing  power  of  a  nation 
by  credit  depends  upon  its  long-established  record  in 
the  past,  its  reputation  for  keeping  its  promises,  the 
attitude  of  its  people  toward  its  governmental  honor, 
its  known  thrift  and  industrial  efficiency,  its  annual  in- 
come, its  taxable  wealth,  and  its  existing  burden  of  debt. 
The  ability  of  a  state  to  fill  up  at  once  the  losses  of  war 
now  going  on  is — apart  from  its  own  internal  productive 
resources — largely  a  question  of  its  borrowing  power,  and 
the  various  influences  affecting  it.  By  getting  loans  a 
government  may  put  off  to  the  future,  when  conditions 
may  be  again  normal,  the  process  of  making  up  its  losses 
by  industry  and  thrift.  An  enormous  debt,  of  course, 
means  heavy  taxation;  but,  strange  as  it  may  seem,  heavy 


58  CREDIT  OF  THE   NATIONS 

taxes,  if  certain  and  skilfully  laid,  do  not  seriously  retard 
industry  and  trade.  Inequality  and  corruption  in  taxa- 
tion do  cause  retardation. 

It  is  sometimes  explained  that  credit  depends  upon  and 
is  limited  by  money  (especially  that  in  bank  reserves). 
This  view,  however,  looks  only  at  the  external  and  purely 
mechanical  processes  through  which  the  fun- 
goods  larger  dameutal  sources  of  credit  register  themselves, 
than  re  ze  .  rpj^^  European  War  is  forcing  us  to  revise  some 
traditional  beliefs.  One  wonders  that  belligerents  can 
keep  up  the  struggle  without  either  economic  exhaustion 
or  financial  bankruptcy.  If  the  inability  to  meet  demand 
obligations  in  the  usual  gold  of  international  payments  is 
an  evidence  of  bankruptcy,  then  several  countries  are 
already  bankrupt.  But  how  can  they  keep  on.^^  It  is 
obviously  a  question,  not  of  money,  but  solely  of  getting 
the  goods  needed  in  war.  What  is  often  overlooked  is  the 
phenomenal  extent,  in  this  modern  era  of  new  power  and 
highly  developed  machinery,  of  the  surplus  of  goods  above 
the  necessaries  of  life.  It  is  almost  inconceivably  large. 
As  long  as  this  prodigious  surplus — or  rather,  the  labor, 
capital,  and  resources  by  which  this  surplus  is  created — 
is  not  used  up,  a  nation  can  go  on  fighting.  Of  course,  in 
a  case  like  that  of  Germany,  the  effect  is  that  of  practical 
confiscation  of  all  surplus  production  to  carry  out  a 
national  purpose. 

Even  in  such  a  case,  cut  off  from  outside  borrowing, 
the  usual  forms  are  made  use  of;  goods  are  taken  by  pur- 
chase or  taxation;  but  the  limit  to  consumption  in  war 
is  the  limit  set  by  production.  The  ultimate  limit  to 
credit  operations,  even  if  confined  to  its  own  peoples,  is 
goods,  and  not  the  various  forms  of  money  no  matter 
how  much  they  may  be  inflated.  The  disruption  of  war 
has  shifted  production  away  from  civilian  needs  to   the 


WAR  AND   CREDIT  >     59 

war  goods  which  disappear  without  replacement.  That 
the  total  amount  of  goods  formerly  needed  to  supply 
men's  wants  has  been  lessened  to  an  amazing  extent  is  ob- 
vious. The  people  could  not  consume  as  much 
as  before,  even  if  they  had  more  gold  than  be-  aiTumits^of 
fore  to  buy  with.  The  war  goods  are  replaced  the  surplus 
only  by  obligations  to  return  goods  in  the  fu-  necessities, 
ture;  that  is,  by  the  engagements  of  the  govern- 
ment to  pay  money  which  it  expects  to  obtain  by  taxing 
the  goods  produced  by  the  people  for  years  and  generations 
to  come.  These  obligations  may  be  the  promises  to  pay 
of  banks  from  which  the  government  has  obtained  loans, 
or  government  notes,  or  short-term  treasury  notes,  or  long- 
term  bonds  bearing  a  rate  of  interest  heightened  by  the 
risks  induced  by  the  chances  of  defeat  in  war.  The  state 
may  try  to  expand  the  claims  on  future  goods  to  its  far- 
thest possibility,  but  it  will  always  be  held  up  by  an 
impassable  barrier,  when  credits  reach  the  limits  of  the 
surplus.  Another  way  of  saying  the  same  thing  is  by 
estimating  the  annual  increase  of  wealth,  or  net  earnings 
above  outlay.  In  Germany — to  continue  our  illustration 
of  a  country  cut  off  from  outside  borrowing — the  net  in- 
come is  placed  at  about  $2,000,000,000.  Already  the 
total  debt  of  Germany,  including  the  enormous  floating 
debts  and  those  incurred  by  the  separate  states  and 
municipalities,  is  over  $30,000,000,000,  the  annual 
charge  on  which  at  5  per  cent  would  itself  eat 
up   three-fourths   of   the   net   income   of   the      Germany 

■•^  nearmg  the 

country.     It  is  a  question  whether  the  extreme      limit  of 
limit  of  credit  has  not  already  been  reached      go^s.^ 
in  this  case.     Certainly  the  lack  of  various 
supplies  seems  to  show  that  the  line  of  necessaries  has 
been  nearly  reached.     It  is  quite  another  matter,  on  the 
contrary,   for  those  belligerents   who  can   obtain  goods 


60  CREDIT  OF  THE   NATIONS 

for  present  consumption  by  borrowing  from  other  coun- 
tries to  any  amount.  They  are  limited  only  by  the  beHef 
in  their  productive  power  after  the  war;  by  the  ability  to 
produce  hereafter  enough  to  meet  the  interest  charge  on 
the  debt,  and  a  surplus  sufficient  to  provide  for  a  steady 
growth  of  capital  and  a  slow  return  to  normal  consumption. 

§  7.  Although  forms  of  credit  rightly  originate  only 
from  transactions  in  goods  (including  gold,  money,  and 
securities),  all  these  operations  are  expressed  in  and  are 
carried  on  through  terms  of  money.  By  a 
reversion  to  curious  reaction  barter,  whose  inconveniences 
^*^®'^-  were  removed  by  the  introduction  of  money 

as  a  standard  of  prices  and  as  a  medium  of  exchange, 
has  been  in  a  sense  restored  through  the  introduction  of 
credit,  which  allows  goods  to  be  exchanged  against  each 
other  with  the  use  of  only  a  comparatively  small  quan- 
tity of  actual  money.  Thus  there  has  been  a  reversion 
to  barter  by  the  introduction  of  credit,  but  only  after  re- 
taining in  the  mechanism  of  exchange  all  the  advantages 
due  to  the  use  of  money.  While  the  gains  from  the  price 
mechanism  are  retained,  the  effect  of  forms  of  credit  is 
to  reduce  the  reliance  on  money  even  as  a  medium  of 
exchange.  In  Anglo-Saxon  countries  this  development 
has  gone  on  to  a  remarkable  extent  through  banks  and 
clearing-houses. 

To  some  the  habit  of  speaking,  for  convenience,  of 
credit  operations  in  terms  of  money  may  cloud  the  under- 
lying, essential  movement  of  goods  and  the  associated 
problems  of  value.  It  may  seem  as  if  all  credit  operations 
were  merely  matters  of  money,  and  that  credit  is  based 
on  money  and  is  directly  affected  by  its  quantity.  Hence 
there  have  arisen  in  popular  use  expressions  such  as  "  banks 
lend  money"  or  "the  rate  at  the  banks  for  money."     In 


WAR  AND  CREDIT  61 

reality  these  ways  of  speaking  refer  only  to  externals 
arising  from  the  fundamental  operations  of  credit.  Banks 
lend  only  purchasing  power  expressed  in  money.  Goods 
are  primary;  money  is  secondary  in  its  function. 

And  yet  it  is  supposed  that  credit,  even  in  its  enormous 
extension  in  modern  times,  must  be  constantly  realizable 
in  actual  money;  that  if  all  credit  transactions  can  be 
converted  into  money  on  demand,  all  is  well; 
if  it  cannot,  that  "credit  has  broken  down.'*  redemption 
We  know,  too,  that  inabilitv  to  pay  in  forms      °^  "^^^^  "^ 

.  "'  .  money. 

of  money  on  demand  is  called  "suspension," 
or  an  evidence  of  bankruptcy  requiring  liquidation  through 
some  considerable  lapse  of  time.  In  fact,  as  an  evitable  /_ 
part  of  modern  credit  practice  there  has  arisen  the  dis- 
tinction between  immediate  redemption  of  credit  forms 
in  legal  money  on  demand,  and  ultimate  redemption, 
which  requires  time  for  sale  and  liquidation  of  assets  not 
convertible  into  cash  on  demand.  For  all  commercial 
banks  which  create  demand  liabilities  for  deposits  or 
notes,  inability  to  pay  any  claimant  on  presentation  of 
a  check,  or  its  own  notes,  is  regarded  as  an  act  of  insol- 
vency. Thus,  on  the  face  of  things,  credit  seems  to  be 
maintained  only  by  money,  or  bank  reserves. 

These,  however,  are  only  the  outer  evidences  of  under- 
lying forces  of  credit,  which  are  easily  understood  when 
analyzed.  Governments  and  institutions  of  credit  create 
demand  obligations,  and  to  meet  them  carry 

,  -D    .  'i  •  1  .  I^ot  possible. 

cash  reserves.  rJut  it  is  a  commonplace  to  say 
that  all  these  demand  obligations  could  not  possibly  be 
paid  in  cash  if  all,  or  even  a  large  part,  of  them  were  pres- 
ented at  once.  N[n  short,  credit  transactions  in  the  main 
cannot  be  redeemed  in  money;  and  that  truth  implies  noth- 
ing as  to  the  unsoundness  of  these  transactions.  Not  only 
can  all  legitimate  credit  dealings  on  demand  not  be  paid 


62  CREDIT  OF  THE  NATIONS 

at  call,  but  they  are  not  in  any  real  sense  dependent  on 
money.  Although  depositors  in  banks  may  count  their 
funds  there  as  available  in  money  at  any  moment,  every 
one  knows  that  all  or  most  of  the  depositors  could  not  at 
one  time  get  money  even  from  the  strongest  banks.  In 
fact,  borrowers  in  these  days  do  not  get  money  as  the  result 
of  a  loan,  but  a  right  to  draw  a  check  which  is  acceptable 
payment  for  all  their  maturing  debts.  What  borrowers 
need  is  not  money,  but  a  means  of  payment.  The  rate 
of  discount  which  a  borrower  pays  in  getting  a  loan  is 
not  a  charge  for  money,  but  for  a  means  of  payment 
available  at  once.  Banks  grant  sound  loans,  based  not 
upon  money,  but  on  the  character  of  the  assets  offered  as 
security.  Firms  manufacturing  and  selling  staple  goods 
on  a  large  scale,  borrow  and  pay  off  their  loans  from  the 
proceeds  of  goods  sold.  The  greater  the  quantity  of  staple 
goods  produced  and  sold  by  a  firm  the  greater  the  forms 
of  credit  likely  to  arise  out  of  the  movement  of  these  goods; 
the  greater  the  sum  of  paper  or  bills  of  exchange  presented 
for  discount;  consequently,  the  greater  the  volume  of  loans 
granted  by  the  banks,  resulting  in  larger  deposit  accounts 
on  which  checks  are  drawn,  and  so  in  a  larger  volume  of 
clearings.  Loans  are  not  made  because  reserves  are 
large,  but  because  good  assets  are  offered.  If  good  loans 
are  thus  offered,  banks  then  see  to  it  that  reserves  are  up 
to  the  limit  fixed  by  law  or  experience. 

Obviously,  credit  institutions,  such  as  banks,  are  en- 
gaged in  the  work  of  coining  goods  into  means  of  pay- 
ment, expressed  in  terms  of  money,  to  enormous  amounts, 
expecting  the  claims  to  money  will  not  be 
money,  the  Called  for,  bccausc  they  are  simply  devices  by 
end  of  which  goods  thus  coined   can  be  exchanged 

exchange.  '         .  . 

agamst  each  other  by  offsets.     The  last  thing 
a  business  firm  wants  is  a  large  sum  of  idle  money ;  it  loses 


WAR  AND  CREDIT  63 

as  long  as  it  holds  it  in  its  possession.  Its  purpose  is  to 
get  goods  sold  and  to  obtain  other  goods  in  their  place. 
This  is  the  whole  secret — if  there  is  one — about  credit 
operations  being  dependent  on  money.  Bank  reserves 
are  kept  nominallj^  to  secure  immediate  redemption  of 
all  demand  liabilities.  In  truth,  they  are  kept  to  secure 
confidence,  in  cases  of  alarm,  a  temporary  rush  to  ob- 
tain cash,  or  doubt  as  to  the  soundness  of  the  bank's 
assets.  A  panic,  or  a  commercial  crisis,  is  a  name  for 
an  attempt  to  convert  a  large  amount  of  demand  claims 
into  cash;  and  shows  that  it  cannot  be  done. 

Since  commercial  banks  loan  mainly  on  the  paper  aris- 
ing from  the  production  and  movement  of  goods,  they 
allow  the  borrower  to  draw  on  them  on  demand,  while 
they  await  the  outcome  of  the  operation  in 
goods.  In  fact,  banks  practically  insure  the  '^'tlsted^'* 
success  of  the  undertaking.  Having  already 
granted  present  means  of  payment  to  the  borrower,  they 
suffer  loss  if  the  transaction  fails  of  success,  and  does  not 
yield  the  proceeds  suflScient  to  repay  the  loan.  The 
liquidity  of  credit  forms  is  constantly  being  tested  by 
being  paid  off  in  terms  of  money  when  due;  yet  even  then 
the  repayment  of  the  loan  is  not  accomplished  by  return- 
ing actual  money  in  hand,  but  usually  by  a  check  on  an 
account  probably  itself  the  result  of  coining  goods  into 
means  of  payment  in  another  bank.  ^By  making  only 
short-term  loans,  and  thus  frequently  testing  the  solvency 
of  the  basic  transaction  in  goods,  the  whole  body  of  credit 
is  renewed  and  kept  healthyi 

The  appearance  of  a  dependence  of  credit  on  money 
is  seemingly  supported  by  the  fact  that  [heavy  imports  of 
gold  strengthens  bank  reserves  and  allows  a  very  great 
expansion  of  loans.  If  it  be  that  good  paper,  based  on 
sound  assets,  is  offered  to  an  extent  that  demand  liabil- 


64  CREDIT  OP  THE  NATIONS 

ities  are  out  of  legal  proportion  to  cash  reserves,  then  the 
new  gold  helps  to  carry  more  loans;  but  even  here  the 
logical  order  of  events  is:  first,  transactions  of  a  sound 
character  in  goods,  then  loans,  and  subsequently 
reserves  and  the  accumulation  of  a  proper  reserve.  On  the 
inflatioii.  other  hand,  merely  because  of  large  gold  im- 
ports, and  large  bank  reserves,  an  increase  of  loans  without 
regard  to  safe  transactions  in  goods  would  be  a  mere  infla- 
tion of  unsound  credit.  This  principle  will  explain  the  fear 
that,  due  to  an  excess  of  American  exports  and  heavy 
imports  of  gold  from  England  during  the  war,  our  credit 
was  in  danger  of  inflation.^  The  prevention  of  this  dan- 
ger lies  in  constant  and  critical  scrutiny  of  the  character 
of  the  transactions  behind  the  paper  offered  for  discount, 
and  in  paying  no  heed  to  the  excess  reserves.  Then,  if 
gold  is  in  supply  beyond  the  needs  of  the  country,  or  for 
bank  reserves,  it  would  be  exported  just  as  we  would  ex- 
port an  excess  of  grain. 

The  effect  of  the  outbreak  of  the  European  War  was 
particularly  marked  because  the  belligerents  had  been 
exporting  and  importing  goods  to  each  other  on  a  very 
large  scale,  and  consequently  the  settlement 
breakdown  of  the  debits  and  credits  arising  from  this 
of  credit  enormous  total  was  suddenly  arrested.  Thus 
there  were  no  basic  means  of  payment  forthcoming  to 
take  up  the  forms  of  credit,  drawn  in  terms  of  money 
payable  at  certain  dates.  This  was  the  critical  situation 
caused  by  the  stoppage  of  trade  when  the  war  began. 
For  those  who  are  not  paid  by  their  debtors  is  there  any 
recourse  but  insolvency.'^  They  have  hundreds  of  mil- 
lions of  demand  liabilities  falling  due  day  by  day,  for 
which  actual  money  can  be  demanded.  If  not  able  to 
pay  in  cash,  because  they  cannot  collect,  can  they  offer 

>  See  Chap.  VI,  §  7. 


WAR  AND  CREDIT  65 

an  acceptable  means  of  payment?  Here  we  find  the 
crux  of  the  whole  crisis  in  credit  brought  on  by  the  war. 
It  was  spoken  of  as  "a  breakdown  of  the  machinery  of 
credit."  This  is  not  an  accurate  statement.  It  was  a 
subtraction  of  the  goods  on  the  movement  of  which 
credit  forms  had  arisen.  The  machinery  of  credit  con- 
tinued to  exist.  For  the  need  of  the  hour  a  means  of 
payment  was  devised  through  the  mechanism  of  credit. 
In  the  case  of  England,  a  loan  by  an  institution  of  credit 
(whose  basis  by  the  authority  of  the  state  was  the  goods 
of  the  whole  nation)  was  the  one  thing  needed.  The 
grant  of  a  loan  gave  the  right  to  draw  on  a  deposit  ac- 
count at  the  Bank  of  England;  and  thus  a  means  of  pay- 
ment was  created  by  which  debts  could  be  met  at  matu- 
rity. The  assets  lying  behind  the  credit  operations  may 
not  all  turn  out  to  be  sound  after  the  war;  if  they  do  not 
yield  proceeds  sufficient  to  take  up  the  loans  sooner  or 
later,  the  amount  will  be  made  up  by  the  state  through 
a  charge  upon  the  public  debt.  The  solution  of  the  un- 
exampled crisis  produced  by  the  outbreak  of  war  was 
thus  found  in  the  workings  of  credit.  It  was  not  a  need 
of  money  for  circulation  in  the  hands  of  the  public.  Yet 
in  Germany  the  remedy  was  supposed  to  be  almost  en- 
tirely that  of  an  issue  of  forms  of  money.  To  the  discus- 
sion of  these  policies  are  we  led  by  the  very  nature  of  credit. 

§  8.  In  spite  of  the  evident  truth  of  the  statement 
that  credit  is  based  on  goods,  and  rises  or  falls  with  the 
volume  of  transactions  in  goods,  why  is  it  believed  by 
some  that  credit  is  directly  dependent  upon  and  limited 
by  money?  Indeed,  as  looking  in  the  same  direction,  it 
is  supposed  (even  by  men  as  high  placed  as  Lloyd- 
George)  that  a  credit  emergency  can  be  relieved  only  by 
additions  to  the  paper  money  of  a  country. 


66  CREDIT  OF  THE  NATIONS 

It  is  observed  by  every  one  that,  in  a  crisis,  the  in- 
ability to  meet  a  maturing  obhgation  by  money,  or  some 
acceptable  means  of  payment  such  as  checks  on  solvent 
.  banks,  is  a  mark  of  insolvency.  There  is  an 
cridu  °"^  assumption,  however,  that  payment  must  be 
obUgations  made  in  money,  or  legal  tender,  and  that  bank 
terms  of  loans  are  directly  limited  by  the  amount  of 

mone^'does      cash   in   the   reserves.     Such   an   impression, 
not  however,    arises    from    considering    only    the 

pass.^^     ^       superficial  phases  of  credit  operations.     In  the 
main  it  is  due  to  a  juridical  reason.     Contracts 
and  credit  obligations  are  necessarily  drawn  in  terms  of 
money,  because  goods  are  valued  and  exchangeable  only 
when  priced  in  some  monetary  standard.     The  enforce- 
ment of  notes,  bills,  and  credit  forms  must  be  in  some- 
thing definite,  capable  of  legal  definition.     Therefore,  aU 
the   enormous  volume]  of  transactions    in   goods   which 
underlie  credit  forms  and  obligations  must  at  some  in- 
stant— not  all  at  once — pass   into   its   equivalent   in   a 
common  denominator  of  value,  so  that  goods  can  be 
offset  or  exchanged  against  each  other  definitely  and  ex- 
peditiously.    Expressed  in  terms  of  money  and  thus  off- 
set, it  does  not  follow  that  enormous  dealings  in  goods 
are  actually   settled   in   money;  even   balances   can  be 
carried  forward  and  thus  make  no  call  for  money.     In 
very  truth,  while  goods  by  the  millions  are  thus  being  j 
exchanged  in  the  markets,  there  is  no  demand  thereby! 
on  bank  reserves;    for  reserves  are  needed  mainly  fori 
exportation,  or  to  adjust  daily  balances   (quickly   recti- 
fied), or  to  quiet  fears  as  to  the  conditions  of  business  or 
solvency  in  a  great  emergency.     When  goods  are  moving 
normally  and  trade  is  brisk  there  is  little  demand  fori 
cash.     As  already  explained,  banks  by  loans  coin  staple] 
goods  into  means  of  payment,  which  are  thus  exchange- 


WAR  AND  CREDIT  67 

able  against  each  other  in  terms  of  money,  through  the 
■use  of  cheeks  drawn  on  deposit  accounts  arising  from  the 
loans.  Such  means  of  paj^ment  have  largely  superseded 
the  actual  passage  of  money  in  Anglo-Saxon  countries. 
For  the  rest,  even  in  a  suit  for  the  collection  of  a  debt  in 
legal  tender,  the  final  payment  is  almost  certain  to  be 
paid  to  the  court  in  a  certified  check;  because  that  would 
be  an  acceptable  means  of  payment  "fea  any  one  in  the 
community.  , 

When  the  United  States  obtained  a  loan  of  $250,000,- 
000  in  April,  1917,  the  banks  made  payment  to  the  Fed- 
eral Reserve  Bank  of  New  York  bj'*' checks  for  their  sub- 
scriptions on  a  certain  day;  ana  on  the  same 
day  the  secretary  of  the  Treasury  handed  over  British  loan, 
a  check  for  $200,000,000  to  the  British  repre- 
sentative (as  a  loan  to  Great  Britain),  which  was  deposited 
by  its  agent  in  the  Federal  Reserve  Bank  of  New  York  to 
the  credit  of  the  British  Government.  To  make  payment 
for  purchases  in  this  country,  the  British  official  gave  a 
check  for  $200,000,000  to  its  ^gent  (J.  P.  Morgan  &  Co.), 
who  presented  it  at  the  counter  of  the  New  York  Federal 
Reserve  Bank,  and  in  return  obtained  twenty  cashier 
checks  for  $10,000,000  each.  These  were  deposited  by 
J.  P.  Morgan  &  Co.  at  various  banks,  which  passed 
them  into  the  clearing-house  as  offsets  for  claims  against 
them,  on  the  same  morning  that  the  Federal  Reserve 
Bank  passed  into  the  clearing-house  the  checks  it  had 
received  in  payment  of  the  loan  of  3  per  cent  treasury 
certificates  the  day  before.  Thus  practically  no  cash 
reserves  of  the  banks  were  disturbed  by  so  large  a  trans- 
action actually  calling  for  the  payment  of  hundreds  of 
millions  of  money. 

There  is  thus  no  antagonism,  if  we  fully  analyze  that 
which  is  really  essential  to  credit  operations,  between  the 


68  CREDIT  OF  THE  NATIONS 

truth  that  credit  is  based  on  goods,  and  the  obvious  fact 
that  all  credit  operations  are  payable  in  money.  If  actual 
money  were  demanded  for  all  these  credit  obligations 
drawn  in  terms  of  money  at  any  one  moment. 
Bank  j^  ^ould  not  possibly  be  paid.     And  vet  there 

reserves  ,  \  ..."  .     . 

do  not  is  no  danger  in  such  a  situation  if  the  credit  is 

u^UoanJ.  really  based  on  soimd  transactions  in  goods. 
If  the  goods  are  salable  at  normal  prices,  the 
credit  obligations  are  effectively  liquidated  at  maturity 
by  a  satisfactory  means  of  payment  (although  not  actual 
cash).  It  is,  however,  a  hard  saying  to  some  that  bank 
reserves  do  not  necessarily  limit  loans;  for  it  is  noted  that 
reserves  must  bear  a  certain  proportion  to  demand  liabili- 
ties, and  that  if  reserves  are  down  to  the  legal  limit,  addi- 
tional loans  are  interdicted.  Here  again  the  superficial 
and  mechanical  phases  of  credit  are  focussed  upon  with- 
out regard  to  what  is  more  essential.  If  there  is  a  legal 
or  customary  reserve  required,  of  course  it  must  be  sup- 
plied. If  good  loans  are  offered  to  a  bank,  in  any  normal 
situation,  it  takes  them  and  then  sets  to  work  to  obtain 
the  required  reserve.  If  it  has  good  assets  it  can  get 
g-old — and  of  recent  years  it  has  been  emphasized  that 
gold  has  become  overabundant.  Thus  there  is  no  limit 
to  reserves  but  the  supply  of  gold.  What  really  happens, 
in  practice,  is  that  the  strength  and  solvency  of  a  bank 
are  determined  not  by  the  amount  of  its  cash  reserves, 
but  by  the  character  and  liquidity  of  the  assets  it  carries 
in  its  loan  items.  In  the  recent  reform  of  the  American 
credit  organization,  which  led  to  the  establishment  of  the 
Federal  Reserve  Banks,  that  truth  came  to  be  regarded 
as  basic./  If  assets  are  liquid,  an  increase  of  reserves  and 
a  means  of  payment  are  quickly  available. 

In   international   trade,   moreover,    the   same   general 
principles  are  at  work.     The  exports  and  imports  of  goods 


WAR  AND  CREDIT  69 

which  form  the  basis  of  international  credit  are  also  sup- 
plemented in  the  financial  account,  by  the  movement  of 
securities,  claims  for  carrying  freight,  travellers'  letters 
and  the  like.     All  these  credit  transactions  are 

ev      .  '      ,  1,1  111  •  1     Breakdownin 

onset  agamst  each  other — and  a  balance  paid   international 
in    gold    only   when   the  account  cannot   be   movement 

.  of  goods. 

carried  forward.  When  a  European  war  of 
the  present  character  interrupts  not  only  the  movements 
of  goods,  but  also  of  securities,  the  very  foundations  of 
credit  are  removed,  although  the  obligations  to  pay  in 
terms  of  money  remain.  At  once  the  attempt  to  call  in 
actual  gold,  the  international  money,  shows  that  ac- 
tual money  cannot  be  had  in  sufficient  amounts.  This 
produces  a  situation  usually  known  as  a  "breakdown  of 
credit."  The  disaster  is  due  not  to  any  deficiency  of 
money,  or  gold,  but  to  the  breakdown  of  the  normal 
movement  of  goods  (and  titles  to  goods  and  services)  on 
the  basis  of  which  a  means  of  payment  might  be  created 
through  credit  operations.  The  machinery  of  credit  still 
exists,  through  which  sooner  or  later  payments  may  be 
made  as  soon  as  goods  begin  to  move  again. 


CHAPTER   III 

ENGLISH   CREDIT  OPERATIONS 

Credit  organization — Acceptances — Discount  houses — Joint-stock 
banks — Bank  of  England — Wealth  and  income — Chronology — 
Stock  exchange — First  shock  to  acceptance  houses — Joint-stock 
banks  demoralized — War  and  credit — Moratorium — Suspension 
of  Bank  Act — Bank  to  the  rescue — Currency  notes — Remedy  in 
credit,  not  in  more  money — Gold  standard — Dislocation  of  trade 
— War  and  capital — Workings  of  crtidit — Inflation — Prices — For- 
eign exchanges — Factors  affecting  price  of  exchange — Return  of 
American  securities — Credits  abroad — Gold  shipments — Neutral 
exchanges — Government  borrowings — Taxation  and  loans — Forms 
of  debt  used — War  loans — Ability  to  carry  the  burden. 

§  1.     While  the  principles  and  fundamental  truths  of 

credit  at  work  in  all  countries  are  essentially  the  same, 

yet,  because  the  growth  of  legal  and  monetary  customs 

has  been  very  different  among  different  peo- 

Comparative     pies,  the  mcchanism  through  which  the  same 

study  of  p  ,  ,  . 

different  forccs  work  may  be  very  different.     This  will 

credir^°  appear  as  we  present  the  credit  operations  of 
the  leading  belligerents  in  the  extraordinary 
conditions  produced  by  the  outbreak  of  the  European 
War.  We  shall  then  have  an  exceptional  opportunity  to 
make  a  comparative  study  of  the  workings  of  different 
systems  under  a  great  and  unequalled  strain  arising  from 
the  same  cause. 

In  Great  Britain  the  credit  organization  is  formed  of 
accepting  houses,  discount  houses,  and  large  joint-stock 
banks — topped  off  by  the  Bank  of  England. 

While  a  note  promising  to  pay  at  a  certain  time  in  the 

70 


ENGLISH  CREDIT  OPERATIONS  71 

future  is  the  usual  form  of  credit  employed  In  this  coun- 
try, in  Europe  it  Is  a  bill  of  exchange  drawn  by  a  seller 
of  goods  on  the  buyer,  asking  him  to  pay  the 
amount  at  a  definite  time  in  the  future.  If 
the  buyer  accepts  the  demand  made  upon  him  in  the 
bill  by  writing  across  the  face  of  it  "accepted,"  with  the 
date  and  his  signature,  it  becomes  a  legal  claim  against 
both  parties  to  the  transaction,  and  thus  the  best  two- 
name  commercial  paper.  Acceptances  may  also  arise  in 
other  ways.  If  persons,  or  commission  houses,  of  good 
standing  need  funds,  for  instance,  to  buy  cotton,  they 
may  arrange  with  banks  or  acceptance  houses  (established 
for  this  single  purpose)  to  let  the  buyer  draw  a  bill  on 
them,  falling  due  at  a  future  date,  and  have  them  accept 
it;  so  that  the  accepted  bill  is  now  an  obligation  of  the 
accepting  house;  and  a  form  of  paper  called  an  "accept- 
ance" is  created  which  is  discountable  wherever  those 
firms  are  known;  that  is,  in  London,  Hamburg,  Paris, 
and  every  European  centre. 

But  in  practice  this  form  of  credit  works  out  In  a  differ- 
ent manner  from  our  promissory  note.     In  the  latter  case 
the  bank  at  once  grants  the  borrower  a  right  to  draw  on 
demand,  and  buys  a  right  to  a  sum  of  money 
in  the  future.     In  the  case  of  an  acceptance,        crates  no 
the  accepting  house  does  not  create  a  liabil-       n^bmtv 
ity  to  pay  money  at  once  on  demand,  nor  does 
it  advance  any  capital.     It  might  seem  as  if  this  basis 
of  credit  were  unsubstantial.     But  in  fact  the  accepting 
house  is  protected  by  an  asset  in  the  form  of  an  engage- 
ment by  the  maker  of  the  bill  to  provide  funds  to  take 
up  the  bill  at  maturity.     The  acceptor  takes  only  the 
risk  that  the  drawer  of  the  bill  will,  or  will  not,  pay 
off  the  bill  before  it  falls  due.     The  acceptor  sells  his 
credit  to  the  maker  of  the  bill,  or  borrower,  thus  giving 


72  CREDIT  OF  THE   NATIONS 

the  paper  a  market  value  as  an  obligation  of  a  widely 
known  institution  of  credit.  The  accepting  house,  there- 
fore, creates  no  demand  liability  against  which 
req^edT^^  it  must  necessarily  hold  cash  reserves;  for  the 
house  cannot  be  called  on  for  payment  until 
the  bill  falls  due,  and  in  the  normal  course  of  events  the 
maker  of  the  bill  will  secure  the  acceptor  against  loss  by 
depositing  funds  before  the  date  of  maturity. 

Being  a  great  reservoir  of  active  capital,  and  having 
transactions  in  goods  or  securities  with  all  parts  of  the 
world,  London  had  accepting  houses  and  banks  on  whom 
bills,  based  on  these  transactions,  had  been  drawn  to  enor- 
mous amounts.  In  normal  times  the  proceeds  from  sales 
of  goods  day  by  day  took  up  the  maturing  bills,  and  cash 
was  little  used.  If,  however,  anything  should  happen  to 
stay  the  movement  of  goods  or  securities,  then  the  basis  of 
credit  would  be  weakened  and  a  means  of  payment  would 
be  unavailable  to  those  having  acceptances  falling  due  in 
the  near  future. 

Originally  the  bill-broker,  as  now  with  us,  was  only  an 
intermediary  between  the  maker  of  a  bill  and  the  buyer 
of  it,  receiving  a  commission  for  making  the  sale.  Out 
of  this  function,  however,  the  English  bill- 
broker  has  been  evolved  into  the  owner  of  a 
small  capital,  who  himself  buys  the  bills;  but  he  still 
counts  on  disposing  of  the  bills  to  banks  who  make  ad- 
vances on  them  to  the  bill-broker  at  call.  Hence  the 
banks  regard  these  loans  as  quick  assets. 

The  discount  house  is  an  evolution  one  step  further. 

It  has  a  larger  capital  than  the  bill-broker.     It  does  much 

the  same  kind  of  business,  but  is  itself  a  perma- 

houses!^*         nent  holder  of  bills  until  maturit^^  and  receives 

deposits   on   which   it   allows   interest.     Like 

any  bank,  it  discounts  bills  of  exchange,  and  in  doing  so 


ENGLISH   CREDIT  OPERATIONS  73 

creates  demand  liabilities.  Its  assets  are  made  up  of 
current  bills  maturing  at  short  terms  as  the  basis  of  loans; 
and  these  bills  arising  from  buying  of  goods  are  expected 
to  be  taken  up  by  borrowers  on  the  sale  of  the  goods. 
Inasmuch  as  it  may  be  called  upon  by  borrowers  at  any 
moment  for  the  funds  loaned,  the  discount  house  puts 
itself  in  funds  by  short-time  loans,  or  loans  on  call,  from 
the  joint-stock  banks.  Thus  the  various  parts  of  the 
credit  organization  are  dovetailed  together,  and  rest  ulti- 
mately on  the  soundness  of  the  transactions  in  goods. 

The  joint-stock  banks  all  together  play  a  very  impor- 
tant role  in  the  operations  of  English  credit.  The  capital 
and  resources  of  some  of  these  banks,  like  Lloyds  (with  a 
capital  of  over  $40,000,000  and  deposits  of 
$535,000,000),  are  the  largest  of  any  private  in-  joint-stock 
stitutions  in  the  world.  They  lend  to  the  ac-  banks, 
ceptance  houses,  to  the  discount  houses,  to  foreign  com- 
mercial houses,  and  in  making  advances  on  securities  as 
collateral  they  carry  a  great  volume  of  stock-exchange  pa- 
per. In  theory  the  joint-stock  banks  do  not  directly  lend 
abroad,  but  in  fact  they  lend  to  acceptance  houses  which 
are  constantly  guaranteeing  the  transactions  of  foreigners 
by  accepting  their  bills  and  so  help  on  the  carrying  of  for- 
eign operations.  Hence,  a  large  volume  of  the  paper  held 
by  these  banks — apart  from  that  based  on  domestic  trade 
— has  originated  outside  the  kingdom.  The  dealings  from 
which  the  forms  of  credit  have  come  into  existence  were 
spread  all  over  the  commercial  world,  such  as  cotton 
shipped  from  Mobile,  coffee  from  San  Paulo,  wheat  from 
Buenos  Ayres,  nitrate  from  Chile,  wool  from  the  River 
Plate,  tea  from  Ceylon,  or  silk  from  Japan.  Thus  a  bill 
drawn  in  English  sterling  on  London  was  used  as  a  recog- 
nized means  of  payment  in  every  part  of  the  world;  it 
flowed  back  to  London  for  settlement  as  a  matter  of  course; 


74  CREDIT  OF  THE  NATIONS 

and  London  had  long  been  accepted  as  the  credit  centre  of 
the  world.  So  true  was  it  that  bills  on  London  had  be- 
come the  customary  means  of  foreign  payment  that  Ger- 
mans, in  their  efforts  to  absorb  the  trade  in  South  America, 
or  elsewhere,  found  it  advisable  to  establish  branches  of 
their  international  banks  in  London  in  order  to  share  in 
dealings  with  paper  inevitably  drawn  on  that  centre. 
Moreover,  many  foreign  individuals,  or  firms,  leave  their 
balances  on  call  in  Anglo-foreign  banks,  or  for- 
rJ^s  ^  "*  eign  agencies  of  British  banks,  throughout  the 
throughout       world  \  and  in  due  course  these  funds  are  usually 

the  world.  ....  . 

invested  in  foreign  bills.  Thus  it  has  happened 
that  English  credit  has  been  founded  on  transactions  in 
goods  in  every  part  of  the  globe.  It  has  been  estimated 
that  one-half  of  the  world's  foreign  trade  was  financed 
by  English  credit.  If  an  American  wished  to  pay  Brazil 
he  would  buy  a  bill  on  London  and  send  it  to  meet  his 
obligation.  Consequently,  any  upheaval  which  would 
interrupt  the  movement  of  goods  in  international  trade, 
or  prevent  the  bills  from  being  paid  at  maturity,  would 
solidify  all  the  credits  centring  on  London.  For  it  is  a 
banking  truism  that  the  ability  of  any  credit  institution 
to  meet  its  demand  obligations,  whether  circulating 
notes  or  deposits,  depends  upon  the  liquidity  of  the  assets 
behind  them;  and  this  liquidity  depends  on  the  free  sale 
and  interchange  of  staple  goods. 

At  the  head  of  the  organization  of  credit  stands  the  Bank 
of  England,  a  banker's  bank,  the  ultimate  protection  to  the 
British  credit  system  in  all  great  emergencies.     Bill-brok- 
ers bring  to  it  for  discount  bills  which  cannot  be 
En^ind  taken  care  of  by  "the  street,"  so  that  the  bank 

rate  differs  by  being  usually  higher  than  the 
rate  in  the  ordinary  market  for  loans.  The  issue  depart- 
ment of  the  Bank  takes  sole  care  of  note-issues  bv  an  auto- 


ENGLISH  CREDIT  OPERATIONS  75 

matic  arrangement  through  which  all  notes  above  £18,- 
450,000  (as  now  standing)  are  covered  pound  for  pound  by 
gold.  Gold  can  be  had  by  presenting  notes,  or  vice  versa. 
The  credit  operations  of  the  country  centre  in  the  banking 
department,  which  is  quite  distinct  from  the  issue  depart- 
ment. It  is  the  reserve  of  the  banking  department,  and 
its  relation  to  the  private  demand-deposit  liability  (known 
as  "other  deposits"  in  the  accounts)  which  is  pivotal  for 
the  rate  of  discount  and  the  ease  of  credit.     „    , 

Bank 

It  is  a  mistake  to  suppose  the  reserves  of  the     reserves  not 
bank  are  kept  in  gold;  on  the  contrary,  they     "^^°  * 
are  mainly   composed  of  the  bank's  own  notes.     This 
might  seem  startling  were  it  not  kept  in  mind  that  the 
notes  are  redeemable  in  gold  on  demand  at  the  issue  de- 
partment, whose  resources  and  operations  are  as  defi- 
nitely separated  by  law  from  the  control  of  the  banking 
department   as    if   it   were   an   independent   institution. 
Therefore,  the  rise  and  fall  of  the  banking  reserves  of  the 
bank  have  nothing  whatever  to  do  with  the  integrity  and 
maintenance  of  the  gold  standard  in  Great  Brit- 
ain.    Moreover,  it  is  only  through  the  banking    ^^^^?^'°.°  °^ 
department  that  an  expansion  of  credit  can     through  the 
take  place  and  practically  without  any  change    departoent. 
in  the  quantity  of  note-issues.     Indeed,  the 
one  great  lesson  in  the  history  of  the  Bank  since  1844, 
when  the  issue  was  completely  separated  from  the  bank- 
ing function,  is  that  an  expansion  or  contraction  of  credit, 
in  its  connection  with  prosperity  or  depression  of  trade, 
can  go  on  independently  of  the  amount  of  note-issues. 
The  banking  operations  are  directly  responsive  to  the 
country's  transactions  in  goods  and  securities.     Incoming 
gold,  if  needed  for  reserves  as  loans  rise,  usually  appears 
in  the  form  of  notes  issued  on  the  deposit  of  gold  in  the 
issue  department. 


76  CREDIT  OF   THE   NATIONS 

§  2.  The  far-flung  lines  of  British  credit  were  due  to 
extensive  investments  of  capital  in  all  parts  of  the  world, 
even  outside  her  own  colonies  and  dependencies.  These 
„     .  productive  operations,  together  with  shipping 

Foreign  i        .,  .  .  i  ^ 

banks  in  and  railways,  set  in  motion  a  great  volume  oi 

°°  °°'  goods    between    other    countries    and    Great 

Britain,  and  accordingly  led  to  the  creation  of  large  credit 
institutions  to  provide  the  means  for  settling  these  inter- 
national dealings.  The  colonial  and  foreign  banks  in 
London,  with  branches  in  all  important  ports,  have  been 
long  established,  because,  as  explained.  Great  Britain  was 
the  earliest  to  develop  the  new  era  of  machinery  and 
power  and  supply  other  countries  with  cheap  goods.  In 
this  respect  she  was  fifty  years  ahead  of  Germany. 

About  the  middle  of  the  nineteenth  century  England 
had  invested  her  capital  in  German  tramways,  gas-works, 
water-works,  cotton-mills,  and  the  like.  She  sold  the 
„  . . ,  Germans  manufactured  goods,  and  got  back 

British  1  M  T   • 

investments  com,  wool,  and  cattlc.  While  these  conditions 
*  ^°^  '  have  now  entirely  changed  as  regards  Ger- 

many, the  work  of  supplying  capital  for  the  development 
of  new  countries  has  gone  on  briskly  in  many  parts  of  the 
world.  It  is  estimated  that  British  capital  was  flowing 
abroad  just  before  the  war  at  the  rate  of  about  $800,000,- 
000  annually.  The  effect  of  this  flow  for  many  decades 
had  given  British  foreign  trade  and  credit  an  unequalled 
pre-eminence,  so  that  one  is  not  surprised  to  have  the 
sum  of  British  investments  abroad  estimated  at  $20,000,- 
000,000,  Consequently,  London  was  owed  by  all  the 
world.  In  particular,  the  United  States,  Argentine,  Bra- 
zil, Chile,  China,  Japan,  Canada,  Australia,  India,  South 
Africa,  the  Straits  Settlements,  and  the  west  coast  of 
Africa  were  directly  dependent  on  England  for  capital, 
and  their  economic  development  had  been  largely  sup- 


ENGLISH   CREDIT  OPERATIONS  77 

ported  by  it  in  the  past.  As  a  consequence,  sums  were 
due  to  England  for  freights,  interest  on  foreign  invest- 
ments, and  the  Hke,  to  such  an  extent  that  British  im- 
ports normally  exceeded  her  exports  in  order  to  cover 
the  balance  due  her.  British  imports  in  1912  were 
$3,164,510,000  as  against  exports  of  $2,436,115,000.  In 
brief,  England  in  the  international  accounting  was  a 
creditor  nation  on  a  vast  scale,  and  she  could  call  in  gold 
at  will  for  the  support  of  her  institutions  of  credit  when- 
ever it  was  needed  to  aid  in  creating  additional  means  of 
payment  for  exchanging  goods.  No  country  in  the  world 
was  in  a  situation  in  which  war  and  an  upheaval  of  in- 
ternational trade,  interrupting  the  daily  liquidation  of 
credit,  would  be  more  destructive  to  her  self-interest. 

Moreover,  English  trade  with  Germany  and  her  North 
Sea  neighbors  was  large.  One-fourth  of  the  whole  trade 
of  Great  Britain  was  going  on  through  the  North  Sea  and 
the  Baltic.  English  exports  to  Germany  alone  ^  •  •  h 
amounted  to  over  $300,000,000,  with  imports  exports  and 
from  there  of  over  $250,000,000.  Between  the  ^^°'^^- 
whole  British  Empire  and  Germany  the  total  direct  trade 
had  risen  to  over  $800,000,000.  British  exports  to  Ger- 
many alone  were  more  than  the  combined  exports  to 
France  and  Italy;  nearly  equal  to  all  the  exports  to  Swe- 
den, Norway,  Denmark,  Netherlands,  and  Belgium  com- 
bined; a  little  more  than  those  to  the  United  States;  and 
more  than  twice  as  much  as  those  to  Russia.  As  offsets, 
she  imported  from,  more  than  she  exported  to,  France,  the 
United  States,  Sweden,  Norway,  Denmark,  Netherlands, 
and  Belgium.  The  corresponding  movement  of  credit 
instruments  based  on  goods — especially  if  those  based  on 
loans,  securities,  freights,  etc.,  be  added — make  up  an 
impressive  total,  which,  through  the  foreign  exchanges, 
obviate  the  sending  of  gold  except  for  occasional  balances. 


78  CREDIT  OF  THE  NATIONS 

Beyond  these  obligations,  domestic  and  foreign,  the 
total  national  wealth  included  non-bankable  property. 
Giffen    put    the    wealth    of    the    United    Kingdom    in 

1912  at  $82,500,000,000,  with  an  income  of 
k?ol*^.""^      $10,600,000,000;    and   for   the   whole   British 

Empire  respectively  at  $125,000,000,000  and 
$17,000,000,000.  The  income  of  the  United  Kingdom 
alone  from  foreign  investments  was  placed  at  $950,000,- 
000,  and  from  shipping  at  $650,000,000. 

§  3.  There  was  something  dramatic  in  the  sudden- 
ness and  force  with  which  the  blow  at  the  end  of  July, 
1914,  fell  upon  the  credit  centre  of  the  world.     Nothing 

in  the  whole  history  of  British  experience 
pSarediTess.   ^^^    equalled,    or    even    nearly    approached, 

the  extraordinary  complications  in  money, 
credit,  and  public  finance  caused  by  the  outbreak  of  the 
European  War.  A  few  weeks  before,  not  only  was  the 
possibility  of  what  actually  happened  regarded  as  almost 
unthinkable,  but  no  preparation  whatever  had  been  made 
to  meet  it.  Looked  at  impersonally,  merely  from  the 
point  of  view  of  credit,  the  condition  of  unpreparedness 
constitutes  the  most  convincing  evidence  of  the  lack  of 
any  intention  on  the  part  of  England  to  bring  on  the 
war.  The  absence  of  a  field  force  to  send  to  the  Conti- 
nent was  no  more  conspicuous  than  the  want  of  all  prep- 
aration for  such  a  struggle  in  the  domain  of  credit  and 
finance. 

The  Balkan  situation,  somewhat  as  a  register  of  the 
chances  of  a  European  war,  had  long  created  a  sensitive 
state  of  mind  on  the  stock  exchanges  of  the  world;  but, 
outside  of  inner  circles  in  Berlin  and  Vienna,  it  was 
not  believed  that  a  crisis  was  imminent.  As  the  Italian 
foreign  minister  later  disclosed,  Germany  and  Austria  had 


ENGLISH  CREDIT  OPERATIONS  79 

intended  to  force  the  issue  in  1913,  but  Italy  refused  to 
join  her  (then)  allies  in  an  offensive  war.  The  looked- 
for  opportunity,  however,  was  created  by  the  murder  of 
the  Austrian  heir-apparent  at  Sarajevo,  June  28,  1914. 

The  crisis  first  showed  itself  in  the  markets  for  securi- 
ties, as  may  be  seen  in  the  following  brief  chronology: 

1914 — ^June  28.     Assassination  of  Archduke  Francis  Ferdinand 
and  his  consort  at  Sarajevo. 
July     5.     Council  of  war  in  BerUn. 
July  13.     Vienna:  a  fall  in  stocks  of  10  to  12  per  cent. 
July  20.     Vienna:    a  further  break  in  stocks.     Semi-of- 
ficial declaration  in  Vienna  that  "  Germany 
stands  on  the  side  of  Austria-Hungary;  that 
the  Serbian  crisis  must  be  cleared  up  in  ac- 
cordance with  the  demands  of  Austria-Hun- 
gary; and  that  it  hopes  the  contest  will  be 
localized." 
July  22.     Austria-Hungary's  ultimatum  to  Serbia  de- 
manding an  answer  by  Saturday  evening, 
July  25. 
July  23.     Berlin:  bourse  panicky.     Great  fall  in  securi- 
ties. 
Paris:  stock  exchange  in  panic. 
July  25.     Russia  announces  she  will  protect  Serbia. 

New  York:  heavy  selling  of  securities  by  for- 
eigners. 
Berlin :  securities  fall  6  to  20  per  cent. 
July  27.     Vienna:  stock  exchange  closed;  also  in  Buda- 

Pesth,  Brussels,  and  Antwerp. 
July  28.     War  declared  against  Serbia  by  Austria-Hun- 
gary. 
Bourses  at  Montreal,  Toronto,  and  Madrid 
closed. 
July  29.     Russia  mobilizes. 

Berlin:  quotations  discontinued. 


80 


CREDIT  OF  THE  NATIONS 


July  30.  •  Panic  conditions  in  London. 

Bourses  at  St.  Petersburg  and  in  all  South 

American  countries  closed. 
Paris:  coulisse  closed. 
July  31.     Paris:  transactions  on  Parquet  suspended. 
London:  stock  exchange  closed. 
New  York :  stock  exchange  closed.    (Last  quo- 
tations on  July  30.) 
German  ultimatum  to  France;   12  hours  to 
reply. 
August  1.     Germany  declares  war  on  Russia,  and  invades 
Luxembourg. 
French  mobilize. 
August  3.     Germany  demands  passage  through  Belgium; 

refused. 
August  4.     German  troops  enter  Belgium. 
English  mobilize. 

11:00  P.  M.     England  declares  war  on  Ger- 
many. 


Selling  of 
stocks. 


To  July  22  the  conditions  of  credit  in  London  had  re- 
mained normal.  This  city,  however,  being  an  interna- 
tional market  for  securities  of  all  countries,  would  be 
directly  affected  by  any  inability  of  foreigners 
to  remit  in  settlement  of  stock-exchange  ac- 
counts. The  selling  of  stocks  and  the  evident 
liquidation  in  all  financial  centres  precipitated  the  crisis. 
In  London  it  was  due  to  the  failure  of  foreign  debtors  to 
meet  their  engagements.  Derenberg  &  Co.,  who  carried 
German  accounts,  not  receiving  remittances,  failed  July 
30;  and  others  must  have  followed  for  the  same  reason. 
The  so-called  breakdown  of  the  foreign  exchanges  meant 
that  firms  were  unable  to  remit  to  London,  because  they 
could  no  longer  convert  their  assets  into  an  international 
means  of  payment.  The  only  exchanges  open  on  July  30 
were  those  of  London,  New  York,  and  the  Paris  Parquet. 


ENGLISH  CREDIT  OPERATIONS  81 

To  prevent  failures,  if  sudden  liquidation  were  forced,  the 
last  stock  exchanges  were  closed^  early  on  July  31,  1914. 
A  London  house,  carrying  a  stock  account  for 
a  client  on  the  Continent  for  purchases  pre-  exchanges 
vious  to  the  war,  would  realize  that  the  ^°^^  ' 
closing  of  European  exchanges,  the  moratorium,  and  the 
postponement  of  the  Paris  settlement  had  locked  up  all 
his  client's  funds.  Sums  due  from  abroad  were  now 
unavailable. 

The  London  joint-stock  banks,  it  will  be  recalled,  car- 
ried very  large  stock-exchange  accounts,  supported  by 
customers'  margins  based  on  the  prices  of  securities.  If 
the  stock  exchange  remained  open,  and  the  panic  forced 
realizing  sales  at  constantly  lower  prices,  the  resulting 
official  quotations  would  have  obliged  the  banks  to  call 
for  larger  margins,  and  would  have  brought  on  many 
failures.  In  fact,  these  banks  made  the  error  in  this 
emergency  not  only  of  calling  in  loans  but  also  of  being 
reluctant  to  lend — which  could  only  aggravate  the  situa- 
tion. It  is  estimated  that  loans  to  the  stock  exchange 
amounted  to  $460,000,000,  of  which  $385,000,000  were 
well  covered.  If  such  large  sums  were  called  in  by  the 
banks,  the  repayment  would  cause  many  and  serious 
failures  among  their  customers.  Therefore,  the  govern- 
ment arranged  with  the  Bank  of  England  to  advance  to 
lenders  on  stock-exchange  loans  outstanding  on  July  29, 
1914,  at  the  prices  of  that  day,  60  per  cent  of  the  value 
of  the  securities  held.^ 

'  The  London  Stock  Exchange  was  opened  again  January  4,  1915.  The  set- 
tlement for  July  was  carried  forward  to  November  18.  During  the  closure  of 
the  exchange  stocks  were  sold  by  negotiation  and  at  minimum  prices  fixed  by 
a  committee. 

*  The  loans  at  a  minimum  of  5  per  cent  would  not  be  pressed  for  repayment 
till  twelve  months  after  peace,  or  till  the  expiry  of  the  Courts  (Emergency  Pow- 
ers) Act  of  August  31,  1914.  The  Bankers  Magazine  reprints  the  official  terms, 
December,  1914,  pp.  702-704. 


82  CREDIT  OF  THE  NATIONS 

The  storm  centre  in  the  week  of  panic  beginning  July 
30,  however,  is  to  be  found  in  the  situation  of  the  accept- 
ance houses.     They,  as  already  explained,  by  accepting 
foreign  bills  and  discounting  these  with  the 
feu  on  the        discount  houscs  and  joint-stock  banks,  became 

accepting  guarantors  of  the  payment  of  the  bills  at  ma- 
houses.  *^,  lit 

turity.     It  became  suddenly  evident,  however, 

that  the  drawers  of  these  foreign  bills  could  not  remit 
funds  on  a  very  large  scale  to  meet  them  when  due.  If 
the  drawers  could  not  pay,  the  acceptance  houses  could 
not;  if  the  acceptance  houses  could  not  pay,  then  these 
bills  which  formed  assets  in  the  discount  houses  and  banks 
were  frozen.  It  is  estimated  that  the  sum  total  of  bills 
involved  amounted  to  about  $1,750,000,000;  of  these  the 
banks  held  from  $500,000,000  to  $625,000,000,  constitut- 
ing perhaps  15  per  cent  of  their  assets.  Three  discount 
houses  (having  a  capital  and  surplus  of  $18,000,000)  had 
discounted  on  June  30  bills  to  the  total  of  $291,000,000. 
Since  the  discount  houses  carried  bills  through  call  loans 
from  the  banks,  they  also  could  not  repay  the  banks. 
Moreover,  the  main  deposits  of  the  business  public  in 
London  were  in  the  joint-stock  banks.  The  inability  of 
foreigners  to  remit  a  means  of  payment  through  the  ac- 
ceptance houses  thus  virtually  held  up  the  power  of  the 
London  banks  to  pay  their  own  customers  on  demand; 
and  yet  their  assets  were  supposed  to  be  about  $5,000,- 
000,000. 

The  crisis  was  not  due  to  a  locking  up  of  money.  In- 
deed, there  was  no  run  on  the  banks  by  the  public.  To 
meet  the  obligations  of  foreigners  in  the  past  the  pro- 
ceeds of  goods  and  securities  had  been  coined 
abeyance  ^"^^  ^  means  of  payment  by  institutions  of 
credit.  Now  what  had  happened  ?  The  send- 
ing of  goods  was  suddenly  stopped,  and  also  the  shipment 


ENGLISH  CREDIT  OPERATIONS  83 

of  gold  from  most  countries.  The  closure  of  the  stock 
exchanges  made  it  impossible  to  realize  on  securities, 
while  new  supporting  loans  could  not  be  had  from  accept- 
ance and  discount  houses  whose  lending  power  had  been 
practically  reduced  to  nil.  In  brief,  the  transactions  in 
goods,  securities,  and  the  like,  from  which  forms  of  credit 
arose,  had  stopped. 

In  the  midst  of  this  critical  situation  the  joint-stock 
banks,  unfortunately  not  rising  to  the  emergency,  showed 
the  white  feather.  In  any  such  state  of  affairs  it  is  the 
first  duty  of  a  bank  to  lend — and  then  to  lend,     ,  .  ^ 

,  .  Ill  Jomt-stock 

m  order  to  save  its  own  customers  and  thereby  banks 
preserve  the  quality  of  its  own  assets.  Its  ^^o^'^i^e  . 
main  function  is  to  allay  panic  and  restore  confidence. 
What  did  the  banks  do  ?  On  Thursday,  July  29,  the  day 
of  payment  on  the  stock  exchange,  the  banks  were  over- 
strict  in  scrutinizing  loans.  Also,  from  the  29th  to  the 
31st  they  began  calling  funds  advanced  to  bill-brokers 
and  the  discount  houses,  so  that  the  latter  were  forced  to 
carry  enormous  amounts  of  bills  to  the  Bank  of  England 
for  discount.  It  was  their  pressure  and  that  of  bill-brok- 
ers for  aid  which  forced  up  the  rate  at  the  Bank  to  8  per 
cent  on  Friday,  and  finally  to  10  per  cent  on  Saturday 
(August  1).  As  if  in  trouble,  the  banks  began  to  draw 
notes  and  gold  from  their  accounts  at  the  Bank  of  Eng- 
land. In  addition,  they  treated  the  public  in  a  way  to 
excite  alarm  where  there  had  previously  been  no  panic. 
Customers,  coming  for  cash  to  use  on  the  coming  holidaj^, 
were  surprised  at  getting  only  10  per  cent  in  gold,  and  90 
per  cent  in  notes  of  the  Bank  of  England.  There  being 
no  bank-notes  in  denomination  below  £5,  the  public  need- 
ing smaller  coins  were  driven  to  present  notes  for  redemp- 
tion in  gold  to  the  issue  department  of  the  bank,  where 
a  long  queue  began  to  form.     As  if  this  were  not  bad 


84  CREDIT  OF  THE  NATIONS 

enough,  some  of  the  banks  tried  to  force  a  policy  of  sus- 
pension of  specie  payments  on  the  Bank  of  England.  Evi- 
dently, most  of  the  joint-stock  banks  had  lost  their  heads. 
Not  so  the  Bank  of  England,  which  preserved  the  best 
traditions  of  English  banking  experience  by  lending  freely 
to  the  bill-brokers.  With  courage  and  good  judgment  it 
took  up  the  burden  thrown  upon  it  by  the 
England  rose  questionable  policy  of  the  private  banks,  not 
to  the  Qnlv  in  these  first  days  of  panic,  but  in  all  the 

situation.  *■  •ix  tit  i  i 

later  period.  It  steadied  the  market  and  pre- 
vented loss  of  confidence. 

It  happened  that  Monday,  August  3,  was  a  regular 
bank  holiday.  The  government  and  the  Bank  proclaimed 
three  extra  bank  holidays,  so  that  no  banks  were  open 
for  business  from  Saturday,  August  1,  until  Friday  morn- 
ing, August  7.  This  gave  time  for  the  authorities  to 
prepare  remedial  measures.  When  the  banks  opened  on 
Friday  there  was  no  excitement  on  the  part  of  the  public 
and  no  rush  to  withdraw  funds.  By  August  7  the  Bank 
had  lost  $73,050,000  in  gold  to  the  Continerrt,  to  the 
banks,  and  to  the  internal  circulation,  while  the  new  loans 
showed  in  the  rise  of  "other  securities"  by  $68,250,000. 
After  August  7  the  exports  of  gold  ceased. 

The  effect  of  war  upon  credit  was  unmistakable.     Its 

ultimate  basis,  as*we  have  already  seen,  is  the  supply  of 

future  goods  and  services  which  are  constantly  emerging 

from  productive   sources   and   which   can   be 

Effect  of  war    relied  on  to  be  sold  in  the  markets  in  a  short 

on  cremt. 

time.  It  is  assumed  that  securities — which  are 
titles  to  parts  of  some  productive  enterprises  and  whose 
value  in  the  market  depends  on  their  productive  power, 
or  earnings — will  be  freed  from  any  interruption  to 
the  certainty  of  normal  production  and  exchange  of 
goods.    But  war  has  a  direct  effect  upon  credit  when  it 


ENGLISH  CREDIT  OPERATIONS  85 

strikes  at  the  certainty  of  the  production  and  exchange 
of  goods;  it  makes  it  uncertain  that  goods,  if  produced, 
will  reach  the  market.  When  it  is  said  that  war  shakes 
the  foundations  of  confidence,  it  is  meant  that  the  ex- 
pectations of  coming  goods  cannot  be  depended  on. 
That  is  why  credit  is  restricted.  For,  if  goods  cannot 
come  forward  as  expected,  their  proceeds  from  sale  in 
the  markets  cease  to  be  a  means  of  paj^nent  for  maturing 
credit  obligations.  Nor  will  credit  be  granted  in  times 
of  uncertainty  as  freely  as  formerly,  and  the  want  of 
credit  reacts  upon  and  slows  up  the  processes  of  produc- 
tion. Moreover,  uncertainty  and  disturbance  of  pro- 
duction cause  violent  changes  in  the  prices  of  commodi- 
ties, and  so  in  the  basis  on  which  credit  is  given. ^ 

It  was  the  working  of  these  fundamental  principles 
behind  the  occurrences  of  the  time  which  produced  the 
difficult  situation  in  English  credit,  sometimes  spoken  of 
as  the  immobility  of  credit.  Obligations  had  been  en- 
tered into  for  payments  on  definite  dates,  but  the  means 
of  payment  had  been  subtracted.^ 

§  4.  The  means  adopted  to  meet  the  greatest  shock 
in  all  history  to  the  credit  system  of  the  world's  financial 
centre  become  of  paramount  interest  to  every  student  of 
the  war.  Nor  in  so  great  an  emergency  was  it  to  be  ex- 
pected that  no  mistakes  would  be  made. 

As  must  be  now  clear,  the  centre  of  difficulty  lay  in 

1  Cj.  A.H.  Gibson  in  Kirkaldy's  Credit  Industry  and  theWar,  1914,  pp.  202-204. 

2  A.  H.  Gibson,  ibid.,  p.  204,  cites  four  causes  for  this  immobility  of  credit: 

1.  Borrowers  on  call  had  transferred  their  funds  to  others  in  anticipation  of 
future  sales  of  goods,  and  they  feared  a  call  for  a  return  of  the  loan  when  their 
funds  were  locked  up. 

2.  The  actual  calling  in  of  demand  loans  by  the  banks. 

3.  If  payment  in  legal-tender  money  were  insisted  on  by  the  lender  in  this 
exigency,  there  was  a  fear  that  there  was  not  enough  to  go  around. 

4.  The  inability  of  foreign  clients  to  remit  to  meet  maturing  bills  because  of 
the  disarrangement  of  the  exchanges  due  to  war  conditions. 


86  CREDIT  OF  THE  NATIONS 

the  breakdown  of  the  acceptance  houses  and  in  their 
unHquid  bills.  On  August  2,  for  the  first  time  in  Eng- 
lish experience,  a  moratorium  for  one  month, 
moratorium  ^PP^y^^g  ^o  bills  of  exchange  accepted  before 
August  4  (if  reaccepted),  was  proclaimed.^ 
On  August  6  another  proclamation  extended  the  mora- 
torium to  all  negotiable  instruments  until  September  4. 
While  making  certain  exceptions,  such,  for  instance,  as  a 
bank-note,  the  moratorium  in  fact  protected  the  joint-stock 
banks  against  the  demands  of  their  depositors.  It  is  a 
serious  question  whether  a  moratorium  was  really  neces- 
sary in  order  to  save  the  acceptance  houses.  If  their 
bills  were,  in  reality,  soon  made  liquid  by  the  action  of 
the  Bank  of  England,  as  we  shall  see,  why  was  a  resort 
made  to  a  moratorium,  a  very  desperate  last  resource.'* 
The  needed  solvent,  used  in  all  similar  contingencies  in 
the  past,  has  been  not  a  postponement  of  debts,  not  the 
increase  of  actual  money,  but  the  creation  of  a  means  of 
payment  by  a  loan  at  an  institution  of  credit  which  would 
in  another  way  afford  the  borrower  time  for  adjustment; 
and  this  means  was  what  actually  met  the  emergency  in 
the  end.  Relief  depended  on  the  lending  power  of  a  bank, 
and  in  this  case  it  was  the  Bank  of  England. 

Although  this  end  was  not  definitely  accomplished  until 
later,  one  step  was  taken  in  this  direction  on  August  6. 
Nor,  as  is  sometimes  mistakenly  assumed,  was  the  quality 
of  its  service  related  to  the  issue  of  more  money.  I 
refer   to   the   suspension  of  that  part  of  the  Bank  Act 

^  This  proclamation  was  legalized,  August  3,  by  the  Postponement  of  Pay- 
ments Act,  which  included  all  negotiable  instruments  (4  and  5,  George  V). 
Apart  from  an  amendatory  proclamation,  August  12,  that  of  September  4  ex- 
tended the  moratorium  to  October  4.  It  was  again  on  September  30  extended 
to  two  months  and  fourteen  days,  making  Monday,  October  19,  the  first  due 
date  (if  the  bills  matured  between  August  3  and  September  3). 

The  various  Moratorium  Acts  in  detail  are  given  by  Hartley  Withers,  War 
and  Lombard  Street,  Appendix  I,  pp.  133-147. 


ENGLISH   CREDIT  OPERATIONS  87 

which  requires  all  notes  put  out  by  the  issue  department 
above  a  certain  strata  (now  £18,450,000)  covered  by  gov- 
ernment bonds  to  be  protected  pound  for  pound  by  gold. 
In  former  suspensions  of  this  provision  of  the    „ 

.  .  Purpose  of  a 

Act,  the  banking  department  has  taken  gov-  suspension  of 
ernment  securities  from  its  assets  to  the  issue  ^^  ^^^  ^^^' 
department  and  obtained  notes  for  them,  which  were  at 
once  placed  in  its  reserves,  thereby  announcing  its  ability 
to  increase  its  banking  reserves  at  will,  and  to  meet  all 
demands  for  loans.  In  the  past  the  Bank  had  first  ob- 
tained the  promise  of  the  premier  to  introduce  a  bill  of 
indemnity  for  the  violation  of  the  Act.  The  whole  point 
of  the  suspension  lies  in  the  enlargement  of  the  reserves 
of  the  Bank,  not  in  a  demand  by  the  public  for  more 
notes  to  be  placed  in  general  circulation.  As  soon  as 
the  suspension  is  announced,  it  is  recognized  by  all  who 
need  loans  that  the  Bank  is  no  longer  limited  in  lending 
by  the  danger  of  falling  reserves;  hence  the  immediate 
allaying  of  all  haste  in  trying  to  get  loans  for  future  emer- 
gencies, and  the  subsidence  of  panic  fears.  Very  few, 
if  any,  of  the  new  notes  secured  by  consols  (instead  of 
gold)  go  into  circulation.  The  panic  is  allayed,  not  be- 
cause money  as  a  medium  of  exchange  has  been  increased, 
but  because  a  loan  can  be  had  bringing  with  it  a  deposit 
account  at  the  Bank,  thus  providing  an  acceptable  means 
of  payment  through  a  credit  operation.  The  check  trans- 
fers effectively  the  means  of  payment  without  the  need 
of  more  money,  through  what  may  be  called  the  deposit- 
currency. 

On  August  6  the  Bank  Act  was  suspended — permitting 
all  needed  issues  of  bank-notes — and  the  bank  was  thus 
ready  to  adjust  its  reserves  to  any  pressure  for  loans. 
In  actual  practice,  between  July  22  and  September  2  the 
increase  of  Bank  of  England  notes  was  only  $42,500,000; 


88  CREDIT  OF  THE  NATIONS 

and  this  gain  was  not  made  under  the  suspension  of  the 
Act,  but  by  a  deposit  of  gold  for  each  new  note  issued 
over  £18,450,000.  In  short,  practically  no  use  was  made 
of  this  suspension  of  the  Act.  That  is,  the 
Suspension      crisis  in  credit  did  not   require  the  issues  of 

in  1914.  ^ 

notes.  The  supposed  demand  for  more  legal- 
tender  currency,  caused  by  fear  of  hoarding,  or  for  notes 
to  go  into  general  circulation  (not  for  reserves  of  the 
banking  department  of  the  Bank  of  England),  could  have 
been  met  under  the  suspension  without  resort  to  the  dan- 
gerous issue  of  government  paper.  An  amendment  allow- 
ing bank-notes  of  £1  and  10  shillings  would  have  made 
the  Currency  Act  unnecessary.^  But,  at  the  same  time, 
a  long-established  tradition  was  abandoned  by  the  pas- 
sage of  the  Currency  and  Bank  Notes  Act  of  that  date, 
when  the  suspension  of  the  Bank  Act  was  left  in  the 
future  to  the  discretion  of  the  Bank  and  the  Treasury, 
without  the  need  of  a  promised  indemnity  from  Parlia- 
ment.^ 

We  are  now  face  to  face  with  the  central  problem  of 
the  whole  credit  situation.  How  could  the  great  mass 
of  unliquid  bills  and  acceptances  be  taken  off  the  market, 
so  that  the  machinery  of  credit  could  be  again  set  in 
motion  ? 

When  the  banks  reopened  August  7  the  bank  rate  was 
reduced  to  6  per  cent,  and  on  the  next  day  to  5  per  cent 
(the  usual  pre-panic  rate  having  been  3  per  cent);  but 

there  was  little  demand  for  loans,  and  there 

Aid  to  the  i        •  •        p         •  i,  rni 

acceptance       was   no    Dusmcss   m   loreigu   exchange.     Ihe 
houses  by        moratorium  had  postponed  the  failure  of  the 

the  bank.  ^         ^  /^        i 

acceptance  houses  until  at  least  October  19; 
but  this  left  the  status  of  the  bills  coming  due  in  the  fu- 

1  Cf.  p.  95. 

*  See  infra,  Section  3,  Currency  and  Bank  Notes  Act,  1914,  Appendix  I. 


I 


ENGLISH   CREDIT  OPERATIONS  89 

ture  uncertain  and  so  unmarketable;  and  failures  would  be 
inevitable  unless  postponement  were  made  until  foreign 
debtors  should  be  able  to  remit  to  London.  Under*  these 
circumstances  no  new  bills  could  be  accepted,  and  normal 
operations  could  not  be  resumed.  The  future  solvency 
of  the  acceptance  houses  being  uncertain,  their  credit  was 
poor,  and  acceptances  had  no  market.  The  Gordian  knot 
was  cut  by  the  Bank,  followed  by  the  bold  policy  of  the 
Treasury.  On  August  13  the  Bank  agreed  to  discount  all 
approved  bills  of  exchange^  accepted  before  August  4, 
without  recourse  to  the  holder,  and  if  unpaid  at  maturity 
the  acceptor  could  further  postpone  payment  to  the 
Bank,  interest  being  charged  at  2  per  cent  above  the 
varjang  bank  rate.  Thus  the  acceptance  houses  were 
provided  with  funds  to  pay  off  at  maturity  all  their  ac- 
ceptances, and  the  assets  of  this  character  in  the  discount 
houses  and  joint-stock  banks  were  at  once  made  liquid. 
The  obligation  between  the  drawer  of  the  bill  and  the 
acceptor  remained  in  force.  The  acceptors  were  expected 
to  collect  from  clients  as  soon  as  possible,  and  use  the 
funds  to  repay  the  bank;  but  acceptors  might  have  until 
one  year  after  the  close  of  the  war  to  repay  amounts  not 
recovered  from  their  clients.-  In  order  to  encourage  new 
business,  new  acceptances  were  to  rank  ahead  of  the 
claims  of  the  Bank. 

Obviously  the  emergencies  of  war,  the  destruction  of 
wealth,  the  changes  in  trade  and  connections,  would  not 
leave  all  drawers  of  pre-moratorium  bills  in  condition  to 

1  Including  such  bills  as  are  customarily  discounted,  and  good  trade  bills, 
and  the  acceptances  of  such  foreign  and  colonial  firms  and  bank  agencies  as  are 
established  in  Great  Britain.  As  to  recourse,  cf.  H.  Withers,  War  and  Lom- 
bard Street,  p.  66. 

^  It  follows  that  if  drawers  were  completely  ruined  by  the  war,  the  bank, 
after  one  year  from  the  end  of  the  war,  would  still  have  a  claim  against  the 
acceptor  for  unrecovered  payments.  In  effect,  the  acceptance  houses  could  not 
hold  as  good  a  position  in  the  future,  with  this  liability  held  over  them. 


90  CREDIT  OF  THE  NATIONS 

repay  eventually  all  their  obligations  which  had  been  dis- 
counted by  the  Bank  of  England  for  acceptors.     Great 

losses  must  be  expected  by  the  Bank.  The 
relieves  the  bold  and  unprecedented  step  was  then  taken 
bank  from        j^y  ^\^q  government  of  guaranteeing  the  Bank 

against  such  future  losses  by  agreeing  to  charge 
them  up  to  the  public  debt.  The  possible  losses  to  the 
state  are  estimated  at  not  over  $150,000,000,  and  may 
be  much  less. 

By  this  credit  operation  of  the  Bank  the  heavy  load  of 
maturing  bills  which  had  stopped  all  business  was  lifted, 
and  bills  not  yet  matured  had  been  discounted  so  as  to 

put  the  banks  in  possession  of  large  sums  to 
bank-  their  credit  at  the  Bank  of  England.     The  ces- 

accounts.  sation  in  the  movement  of  goods  or  securities, 
the  abandonment  of  new  enteiprises,  the  restriction  on  gen- 
eral business,  and  a  general  caution,  resulted  in  very  few 
new  bills  being  offered.  Of  course  there  were  no  new  loans 
on  securities  while  the  stock  exchanges  were  closed.  Hence 
the  call  rate  was  very  low,  and  loans  were  easy.  The 
effect  of  this  extension  of  credit  can  be  seen  in  the  ac- 
counts of  the  Bank  (see  Chart  II).  The  discounts  ("other 
securities")  by  September  2,  in  comparison  with  normal, 
had  trebled;  and  private  deposits  ("other  deposits")  had 
gone  even  higher.  The  extent  of  the  burden  laid  on  the 
Bank  to  relieve  the  crisis  by  new  discounts,  comparing 
July  22  with  September  2,  was  about  $440,000,000. 
By  the  end  of  August  the  immediate  needs  created  by  the 
outbreak  of  war  were  cared  for.  There  was  no  tendency  to 
an  increase  of  discounts  ("other  securities")  until  the  up- 
heaval of  1915.  The  perturbation  of  the  bank-accounts  un- 
til November,  1915,  as  seen  in  the  red  and  green  lines  of  the 
chart,  shows  how  long  it  took  to  recover  again  a  fair  ad- 
justment to  new  war  conditions.     But  it  is  to  be  noted 


ENGLISH    CREDIT   OPERATIONS  91 

that  this  upheaval  was  on  a  scale  far  less  than  that  of  Ger- 
many and  France  (see  Charts  IV  and  V)  and  speaks  vol- 
umes for  the  eflSciency  of  the  English  credit  system,  or  of 
the  genius  of  the  people  for  banking  sense. 

An  interesting  situation  followed  the  aid  given  by  the 
Bank  of  England  in  making  liquid  the  pre-moratorium 
bills.  The  direct  purpose  of  the  action  by  the  Bank  was 
to  render  the  bills  marketable,  and  therefore 
discountable  at  the  usual  agencies  of  credit,  ^^unted 
It  was  not  intended  that  the  whole  burden  unduly  at  the 
should  fall  on  the  Bank.  Again  the  joint-stock  England, 
banks  failed  to  rise  to  their  full  duty.  These 
bills  being  guaranteed  but  not  yet  matured  need  not 
have  been  discounted  at  once.  In  fact,  however,  the 
banks  discounted  the  bills  at  the  Bank  of  England  beyond 
their  actual  need  for  cash,  solely  to  cover  unknown  future 
contingencies.^  Thus  the  banks  had  large  balances  at  the 
very  time  when  restricted  trade  caused  a  lessened  demand 
for  loans.  Although  short-term  loans  were  repaid  to  the 
banks,  they  made  no  new  loans.  Due  to  this  attitude, 
there  was  an  abundance  of  idle  funds,  as  indicated  then 
and  later  by  the  very  low  market  rate  of  23^  to  3)^  per  cent 
or  even  less.  Hence  large  sums  of  treasury  bills  were  taken 
by  the  timid  banks  at  3^  per  cent  to  employ  idle  funds. 
Without  doubt,  we  here  have  the  evidence  to  show  the 
absence  of  any  reason  for  the  moratorium.  In  a  short 
period  the  Bank  had  met  the  need  of  a  means  of  payment 
for  acceptance  houses  and  for  acceptors  of  all  bills  drawn 
before  August  4.  There  seemed  to  be  a  spirit  in  the 
government  eager  to  push  governmental  interference 
without  testing  out  tried  expedients.  As  we  shall  see, 
the  moratorium  was  the  least  of  these  mistakes. 

The  loss  of  their  heads  by  the  banks  in  refusing  to  pay 

*  Cf.  J.  N.  Keynes,  Economic  Journal,  December,  1914,  p.  613. 


92  CREDIT  OF  THE  NATIONS 

out  gold  led  to  the  fallacious  belief  that  the  restoration  of 

credit  depended  on  the  issue  of  more  money — the  insidious 

microbe  that  multiplies  without  limit  in  the 

Fallacy  of  the  .  ,    , 

demand  for  minds  of  finance  ministers  when  trying  to  stem 
more  money.  ^|^^  difficulties  arising  out  of  war  or  panic.  It 
is  a  part  of  the  disease  that  assumes  credit  to  be  based 
on  money ;  and  of  the  more  general  theory  that  prices  are 
directly  affected  by  the  quantity  of  money  in  circulation. 
There  is  no  place  here,  however,  for  the  discussion  of  this 
general  theory.^  Present  attention  must  be  given  to  the 
issue  by  Lloyd-George  during  the  bank  holidays  of  gov- 
ernment notes  to  serve  as  money.  Here,  again,  we  must 
challenge  a  departure  from  English  monetary  traditions 
never  before  tried  in  the  history  of  the  kingdom.  When 
the  banks  were  open  on  July  31  and  August  1,  the  fear 
was  expressed  that  they  might  not  have  the  cash  to  meet 
demands  of  their  customers;  that  there  "might  not  be 
money  enough  to  go  around."  It  has  been  generally 
supposed  that  the  bank  holidays  were  extended  to  August 
7  to  allow  time  to  prepare  an  emergency  circulation  in 
the  form  of  currency  notes.  These  had  been  authorized 
in  the  same  Currency  and  Bank  Notes  Act  of  August  6, 
1914,  which  had  also  suspended  the  Bank  Act.  The  issue 
of  currency  notes  for  denominations  of  £1  and  of  10  shil- 
lings by  the  Treasury  were  permitted  and  made  unlimited 
legal  tender.- 

In  effect  they  were  issued  through  the  Bank  of  England 
to  bankers,  to  Scottish  and  Irish  banks  of  issue,  to  the  post- 
office  savings-banks,  and  to  the  trustees'  savings-banks, 
as  a  loan  at  the  rate  of  5  per  cent  up  to  a  maximum  of  20 
per  cent  of  their  liabilities  on  deposit  and  current  ac- 

*  See  the  author's  Principles  of  Money  (1903). 

'  PosL'il  orders,  under  the  same  theory  of  scarcity,  were  also  made  legal  ten- 
der.    See  Appendix  I  a. 


ENGLISH   CREDIT  OPERATIONS  93 

counts/  and  were  a  floating  charge  on  the  assets  of  the 
bank  up  to  the  amount  of  notes  granted.  In  case  ad- 
vances were  repaid  by  the  banks,  the  sums  went  to  a  sep- 
arate fund  at  the  Bank  of  England,  called  the  ^ 
"Currency  Note  Redemption  Fund,"  under  currency 
public  deposits.  The  notes  themselves  may 
have  gone  into  general  circulation,  but  the  holder  could  by 
law  get  gold  for  them  if  presented  to  the  Bank  of  Eng- 
land ;  thus,  although  they  were  not  the  obligations  of  the 
Bank,  yet  as  a  government  agency  the  Bank  had  to  pro- 
vide the  gold,  and  the  notes  were,  in  effect,  an  obligation 
on  the  gold  funds  of  the  Bank.  A  certain  amount  of  gold 
was  "earmarked"  for  the  notes,  which  since  July  28, 
1915,  has  steadily  remained  at  $142,500,000.  When  the 
banks  returned  advances,  they  transferred  deposits  to 
their  credit  at  the  Bank  to  the  account  of  public  deposits, 
not,  of  course,  producing  any  gold.  Moreover,  they  used 
any  of  these  notes  in  their  possession  in  paying  off  loans 
from  the  Bank;  since,  also,  they  received  nothing  else 
from  their  customers.  Most  of  the  notes  appear  to  have 
been  issued  directly  in  payment  of  wages,  salaries,  and 
the  like. 

The  total  issues  of  these  notes  have  now  (November  14, 
1917)  risen  to  $956,500,000,  against  which  the  cash  re- 
serve is  only  14.9  per  cent,  the  remainder  being  covered 
mainly  by  government  securities.  The  banks 
hold  only  $245,000.  The  notes  are,  therefore,  a  forced  loan 
in  effect  a  forced  loan  to  the  state  and  must  be 
judged  accordingly.  The  issue  of  a  loan  in  the  form  of  a  de- 
mand liability  of  the  Treasury  has  always  been  regarded  as 
a  sign  of  financial  sterility.     It  confuses  the  fiscal  with  the 

*  Hartley  Withers  estimates  that  under  this  regulation  the  banks  could  have 
taken  $1,125,000,000,  but  actually  took  only  $65,000,000.  War  and  Lambard 
Street,  p.  33. 


94  CREDIT  OF  THE  NATIONS 

monetary  functions  of  the  state.  It  is  a  poor  way  to  bor- 
row, and  as  a  creation  of  new  money  it  exposes  the  world 
of  business  to  the  perils  of  inflation,  if  not  to  the  inevitable 
effects  of  a  depreciation  of  the  standard  of  prices  and  con- 
tracts. The  fallacious  thinking  of  the  joint-stock  banks, 
and  their  scare,  had  somehow  tainted  the  monetary  atmos- 
phere. In  England,  of  all  places,  where  a  loan  would  give 
a  deposit  account,  where  checks  were  the  normal  means  of 
payment,  and  actual  money  little  used  except  for  retail 
transactions,  it  was  passing  strange  that  the  need  of  the 
hour  should  be  diagnosed  as  a  need  of  more  money,  when 
in  fact  it  was  a  need  of  credit — fully  met  by  the  Bank  of 
England.  In  the  country  which  had  given  to  the  world 
the  deposit-currency  (checks  drawn  on  bank  deposits),  a 
marvellously  flexible  medium  of  exchange  doing  its  work 
with  a  minimum  of  actual  cash  for  paying  balances,  gov- 
ernment issues  could  not  possibly  be  justified  because  of 
any  lack  of  an  efficient  medium  of  exchange. 

Keeping  in  mind  that  the  Bank  of  England  issued  no 
notes  in  denominations  below  £5,  and  that  the  needed 
money  for  pocket  use  was  composed  of  gold  sovereigns 
„,         ,        and  half-sovereigns  (with  silver  for  fractional 

Why  try  to  i  •  i     i  i     • 

avoid  issue  of  curreucy),  it  may  be  said  that  the  notes,  being 
made  of  denominations  of  £l  and  of  10  shillings, 
would  take  the  place  of  the  gold  and  free  it  for  the  sup- 
port of  credit.  It  may  also  be  true  that  some  of  this 
small  gold  was  hoarded  and  change  was  scarce,  as  on  the 
Continent.  But,  strangest  of  all,  it  was  urged  in  favor  of 
this  radical  and  unprecedented  departure  in  English  policy 
that  it  would  save  the  issue  of  Bank  of  England  notes,  and 
avoid  the  paying  out  of  gold  reserves  by  the  Bank.  Such 
points  of  view  are,  under  the  circumstances,  inexplicable. 
The  issue  of  bank-notes  would  have  been  the  safe  and 
traditional  recourse.     The  Bank  Act  had  been  suspended 


ENGLISH  CREDIT  OPERATIONS  95 

by  the  same  Act  authorizing  the  currency  notes. ^  If  notes 
of  small  denominations  were  needed  to  replace  the  small 
gold,  it  could  have  been  safely  accomplished,  and  kept 
within  monetary  rules,  by  permitting  the  bank  to  issue  £1 
and  10  shilling  notes.  The  notes  would  thus  have  been 
confined  to  their  monetary  function,  and  not  have  been 
used  as  a  fiscal  measure  for  borrowing  in  a  way  condemned 
by  all  financial  history.  Nor  would  there  have  been 
thereby  any  serious  enlargement  of  Bank  of  England 
notes.  The  examination  of  Chart  II  shows  very  plainly — 
supported  by  the  history  of  the  banking  department  since 
1844 — that  exceptional  needs  for  credit  and  a   „ 

p    11  1-111  No  need  for  a 

means  of  payment  are  fully  supplied  by  loans  medium  of 
and  deposits;  and  that  there  has  been,  in  addi-  ®^<^^^se. 
tion,  little  demand  for  more  forms  of  money  to  serve  as 
a  medium  of  exchange.  The  only  justification  for  the 
currency  notes  was  either  that  (1)  they  were  absolutely 
needed  as  a  medium  of  exchange,  or  that  (2)  their  issue 
aided  the  lending  power  of  the  banks.  The  first  has  been 
shown  to  be  baseless.     As  to  the  second,  they     _ 

•^        Remedy  not 

could  have  been  of  use  only  if  the  gold  they  money,  but 
displaced  had  gone  into  the  reserves  of  the 
banking  department  whose  loans  really  maintained  the 
credit  organization  of  the  country.  There  is  no  evidence 
to  show  that  this  gold  went  into  the  Bank  of  England. 
If  it  did,  it  went  to  the  issue  department.  In  truth,  the 
great  force  which  removed  the  congestion  of  credit,  and 
put  the  frozen  assets  into  liquid  form  again,  was  the  lend- 

'  It  does  not  seem  to  be  accurate  to  say  that  the  Act  is  or  ever  has  been  sus- 
pended "  To  provide  a  fresh  stock  of  cash  for  bankers.  .  .  .  Because  they  are 
wanted  to  take  the  place  of  the  cash  that  the  frightened  public  has  taken  out 
and  hoarded,  and  .  .  .  because  in  times  of  panic  many  people  refuse  to  accept 
payment  in  checks,  which  are  now  the  usual  currency  of  internal  commerce." 
Hartley  Withers,  War  and  Lombard  Street,  pp.  8-9.  Cf.  p.  30.  In  the  past, 
relatively  few  notes  were  called  into  general  circulation  at  the  time  of  suspension ; 
and  in  1914  there  was  no  perceptible  refusal  of  checks  by  the  public.  In  fact, 
the  public  were  calm.     It  was  the  banks  that  were  scared. 


96  CREDIT  OF  THE   NATIONS 

ing  power  of  the  banking  department  of  the  Bank  of  Eng- 
land. And  it  is  of  more  than  passing  significance  that  this 
end  was  accomplished  without  any  perceptible  resort  dur- 
ing the  height  of  the  crisis  to  an  increased  quantity  of 
bank-notes  put  out  by  the  issue  department  under  the 
suspension  of  the  Act.  From  whatever  angle  we  ap- 
proach the  subject  we  are  forced  to  conclude  that  the  eflB- 
cient  remedy  was  not  a  matter  of  money,  but  of  credit. 

The  case  for  the  currency  notes,  at  the  moment,  how- 
ever, seems  to  have  depended  upon  the  real  need  for  such 
notes  to  be  paid  out  as  cash  to  customers  by  the  banks, 
or  upon  the  extent  of  hoarding  which  actually 

Heed  of  ^  i  i  •         i  i  i 

reserves  for  took  place  and  causcd  a  shortage  m  the  gold 
the  banks.  normally  used  in  transactions  calling  for  de- 
nominations below  the  £5  bank-note.  Two  different  con- 
siderations are  here  involved:  (1)  There  was  the  need  of 
res.erves  by  which  the  joint-stock  banks  and  their  branches 
could  meet  demand  liabilities.  At  the  moment  of  con- 
fusion there  might  have  been  a  feeling  that  legal-tender 
money  was  scarce,  and  those  who  found  their  assets 
locked  up  were  in  a  panic.  But  at  no  time  would  it  have 
been  impossible  for  a  joint-stock  bank  to  have  obtained 
a  loan  from  the  Bank  of  England  and  thus  have  secured 
bank-notes  for  its  reserves.  Moreover,  they  held  large 
gold  reserves  in  their  own  vaults.^     Why  should  it  have 

1  The  mint  authorities  estimated  that  on  June  30,  1914,  about  $222,000,000 
of  gold  were  held  by  the  banks  (excluding  the  Bank  of  England)  and  $391,500,- 
000  by  the  public.     {Cf.  Kirkaldy,  Labour,  Finance,  and  War,  p.  236.) 

It  was  estimated  by  the  London  Economist  (.Vugust  15,  1914)  that  English 
stocks  of  gold  at  the  end  of  June,  1914,  were  as  follows  (in  millions) : 

London  joint-stock  banks  held  actually  in  gold  and  Bank  of  Eng- 
land notes $250 

Bank  of  England 150     

Total  in  banks $400 

In  circulation 100 

$500 
For  all  the  banks  cash  holdings  were  $1,0G5,  with  deposits  of  $3,70Q  millions. 


ENGLISH  CREDIT  OPERATIONS  97 

been  assumed  that  money  was  scarce  ?  The  banks  at  this 
critical  juncture  committed  the  greatest  possible  error. 
By  their  own  refusal  to  pay  gold,  and  by  showing  distrust 
of  the  Bank  of  England  notes,  they  themselves  created 
the  only  alarm  which  arose.  Had  they  acted  on  the 
principle  that  reserves  were  to  be  used  when  called  upon 
in  exactly  such  an  exigency,  and  not  to  be  hoarded  at 
the  only  time  when  needed,  there  would  have  been  no 
example  set  for  hoarding  by  the  general  public. 

But  (2)  even  under  such  suggestion  coming  from  the 
banks,  hoarding  by  the  public  seems  to  have  been 
insignificant.  It  kept  its  head  better  than  the  banks. 
The  reports  of  the  savings-banks  for  1914 
showed  trivial  withdrawals.^  There  was  a  ^y°^^e"ubifc. 
demand  on  the  Bank  of  England  for  gold  to 
go  to  the  provinces  for  the  week  ending  July  29,  and  for 
still  more  the  next  week,  all  told  an  internal  drain  of  less 
than  $50,000,000  in  these  two  weeks.  Such  a  movement 
was,  of  course,  carried  on  through  the  joint-stock  banks 
and  their  branches.  In  Chart  II  it  may  be  seen  that  in 
the  week  ending  August  7,  1914,  there  was  a  drop  in  both 
note-issues  and  in  reserves — in  each  case  amounting  to 
about  $50,000,000 — but  that  before  the  month  was  out 
this  subtraction  was  more  than  made  good.  It  was  ob- 
vious that  the  impetus  given  by  the  banks  to  force  people 
to  take  notes  to  the  issue  department  for  gold  caused  a 
fall  in  the  amount  of  notes  outstanding.  The  withdrawal 
of  cash  is  sufiiciently  accounted  for  by  the  internal  drain. 
There  the  effect  ended.  To  account  for  hoarding  there 
must  be  some  panic;  but  there  was  no  panic,  since 
nothing  could  be  done  during  the  moratorium  and  the 
holidays  until  Friday   (August  7);  and  when  the  banks 

^  Cf.  Kirkaldy,  ibid.,  p.  215.     Sir  R.  H.  Inglis  Palgrave  also  informs  us  that 
there  was  very  little  hoarding  by  the  public,  it  being  even  less  than  in  1866. 


98  CREDIT  OF  THE   NATIONS 

opened  that  day  there  was  no  run  whatever  by  depos- 
itors. 

Nevertheless,  because  of  a  scare  among  the  banks,  and 
a  fear  of  a  possible  hoarding  (which  in  fact  did  not  ma- 
terialize) a  case  of  a  certain  sort  might  be  made  out  in 
support  of  the  issue  of  currency  notes,  as  a 

X^OSSlDlc  CaSc  -i    1     •  ^ 

for  currency  temporary  measure.  Suppose  the  gold  m  the 
°°*^^'  circulation    below    the    £5    notes    had    disap- 

peared. How,  then,  could  the  banks  supply  manufac- 
turers and  others  with  cash  for  meeting  pay-rolls,  wages, 
and  the  like  ?  Normally,  this  is  easilj^  done,  for  the  cash 
is  soon  spent  for  goods  and  comes  back  again.  Perhaps 
there  may  have  been  a  wide-spread  fear  as  to  the  sound- 
ness of  credit;  and  an  attempt  may  have  been  made  to 
transfer  obligations  based  on  goods  into  actual  money. 
On  any  great  scale,  of  course,  this  never  could  have  been 
done;  and  a  panic  would  have  ensued  to  be  followed  by 
slow  and  prolonged  liquidation.  But  no  such  thing  hap- 
pened in  this  case.  At  the  least  there  might  have  been  a 
demand  for  cash  in  the  strata  of  retail  operations.  As- 
suming this  situation,  it  may  have  been  necessary  to  pro- 
vide an  emergency  currency  to  meet  a  sudden  exigency.* 
On  this  theory  the  currency  notes  might  have  been  justi- 
fied; to  be  withdrawn  when  the  exigency  had  passed. 
Yet  whatever  the  justification  for  this  purpose,  it  ceased 
to  exist  when  the  notes  were  later  enormously  expanded 
and  used — ^because  the  repeated  resort  to  the  printing- 
press  is  easy  when  once  begun — as  a  fiscal  device  for  get- 

'  Kirkaldy  mentions  the  need  of  additional  currency  in  order  to  meet  the  de- 
mands of  mobilization;  to  replace  the  small  quantities  of  gold  coins  which  had 
been  transmitted  unobserved  to  foreign  countries;  to  replacethe  hoarding  by 
the  general  pul)lic;  t(j  provide  increased  legal-tender  reserves  against  the  in- 
creased deposits  of  the  joint-stock  banks;  and  to  furnish  an  additional  money 
to  meet  the  higher  level  of  prices  and  wages.  Labour,  Finance,  and  the  War, 
p.  i'M. 


ENGLISH  CREDIT  OPERATIONS  99 

ting  a  loan.  Moreover,  even  then,  if  any  emergency  cir- 
culation were  needed,  why  not  have  supplied  it,  as  al- 
ready suggested,  under  the  suspension  of  the  Bank  Act 
by  getting  permission  to  issue  notes  in  denominations 
under  £5  ?  Indeed,  the  elasticity  of  credit,  for  which  the 
English  system  is  famous,  could  very  simply  have  been 
supplemented  by  a  body  of  small  notes  issued  by  the  Bank 
to  supply  elasticity  of  currency  in  temporary  emergencies. 
The  belief  that  the  issue  of  paper  money  is  necessary 
to  cope  with  crises  dies  hard,  especially  where,  as  in 
France  and  on  the  Continent,  a  borrower  expects  to  be 
supplied  with  notes,  and  does  not  use  checks,  in 
making  payments.  In  England  and  the  United  cre^dit  system 
States,  even  in  a  time  of  crisis,  all  that  a  man    ^''^  °°*  °®®** 

more  money. 

m  distress  wants  is  a  means  of  payment  accept- 
able to  his  creditors.  If  he  can  get  a  loan  at  a  bank,  a 
check  on  the  resulting  deposit  account  gives  that  accept- 
able means  of  payment.  He  does  not  wish  bank-notes. 
They  are  needed  only  for  retail  dealings  or  for  conditions 
when  men  lose  their  heads  and  try  to  turn  credit  obliga- 
tions into  cash.  The  only  possible  reason,  therefore,  for 
an  emergency  currency  in  England  lies  in  this  last  con- 
tingency, arising  from  sudden  alarm.  The  obvious  rem- 
edy is  that  which  would  allay  fear.  In  the  past  the  sus- 
pension of  the  Bank  Act  has  been  effective,  not  because 
of  any  considerable  addition  to  bank-notes  in  general  cir- 
culation, but  because  it  has  assured  the  legitimate  bor- 
rower of  the  certainty  of  credit  if  he  needs  it.  It  shows 
a  lack  of  understanding  of  the  true  inwardness  of  credit 
methods  in  England  to  say,  as  does  Liesse : 


If  the  Bank  of  England  had  a  less  archaic  and  more  flexible 
machinery  of  issue,  the  system  would  be  perfect,  and  crises 
in  the  English  market  would  be  less  acute.  .  .  .     The  English 


100  CREDIT  OF  THE  NATIONS 

joint-stock  banks  .  .  .  have  not  in  the  Bank  of  England  the 

same  resource   [as  the  French  banks  ^ave   at   the  Bank  of 

France],    for  it  is  just  at  the   moment   when   it 

French  ought  to  increase  its  issue — that  is  to  say,  in  panic 

criticism  of       times— that  it  is  bound  by  the  Act  of  1844.     Evenj 
English  ^77-  1  1  . 

system.  system  of  bank  issue  must,  then,  tend  to  give  .  .  . 

the  greatest  possible  elasticity  of  issue  in  order  to 
cope  with  crises.  What,  in  fact,  is  needed  at  these  difficult  mo- 
ments ?  More  currency  than  in  normal  times.  Who  can  supply 
it  ?  A  bank  issuing  bills  against  reliable  securities,  such  as  com- 
mercial effects.  It  is  these  effects  that  must  be  coined  into 
money,  and  made  to  circulate,  until  calmer  days  arrive.^ 

Such  is  the  point  of  view  of  a  country  where  payments 
are  made  only  by  actual  passage  of  money.  It  is  the 
error  of  confusing  the  elasticity  of  credit  with  the  elasticity 
of  the  currency  which  was  recognized  here  in  creating  the 
Federal  Reserve  system.  Commercial  assets  can  be  coined 
now  at  the  banking  department  of  the  Bank  of  England 
into  a  means  of  payment  quite  as  effective  as  any  form 
of  money  or  bank-notes;  and  it  was  true  at  the  height  of 
the  panic  in  1914. 

There  remains,  nevertheless,  the  means  of  supplying 
small  notes,  or  a  limited  quantity  of  emergency  circula- 
tion, to  cover  hoarding  or  acts  of  fear  by  ignorant  persons. 
If  the  issue  of  less  than  £1  notes  by  the  Bank 
Emergency       would  not  covcr  this  possibility — although  I 

notes  based         ,  .         .  . 

on  thmk  it  would — then  give  the  Bank  the  power 

pape?.^'"        to   issue,   Under   strict   banking,   not   govern- 
mental,   surveillance,    a    certain    quantity    of 
emergency  circulation   based   on  the  deposit  of  picked 
commercial  paper  (as  suggested  by  Sir  R.  H.  I.  Palgrave)  ^ 

•  National  Monetary  Commission  (1909),  No.  522,  pp.  195,  216. 

'  Bankers  Magazine,  April,  1915,  p.  592.  Also  October.  1914,  p.''458.  Lord 
Sherbrooke's  scheme  of  1873  based  the  emergency  notes  on  securities  rather 
than  on  commercial  paper.  Our  Aldrich-Vreeland  notes  were  based  on  both; 
while  our  new  Federal  Reserve  notes  will  in  the  end  require  only  commercial 
paper. 


ENGLISH  CREDIT  OPERATIONS  101 

to  be  automatically  retired  as  soon  as  the  emergency  has 
passed.  The  mere  possibility  would  no  doubt  make 
actual  resort  to  it  unlikely,  especially  so  long  as  the  Bank 
by  freely  discounting  provides  an  elastic  deposit-currency 
based  upon  an  elasticity  of  credit. 

§  5.  The  maintenance  of  the  gold  standard  by  Great 
Britain,  in  contrast  to  the  action  of  all  the  other  European 
belligerents,  and  in  spite  of  her  issue  of  currency  notes  by 
the  Treasury,  is  an  outstanding  fact  of  the  first  impor- 
tance. Nor  is  its  influence  on  the  credit  situation  and 
on  prices  of  any  less  significance. 

The  preservation  of  the  gold  standard,  in  all  the  stress 
of  an  unprecedented  war — in  contrast  to  the  policy  of 
Germany  and  France,  which  sucked  up  all  the  gold  that 
could  be  obtained  from  the  general  circulation, 
accumulated  it  in  the  central  banks,  and  vet     Why  British 

.       .  .  could 

from  the  begmning  suspended  specie  payments  maintain 
on  their  bank-notes — is  undoubtedly  due  in  ftendard. 
part  to  the  British  traditions  in  favor  of  gold 
payments,  and  in  part  to  the  control  of  the  seas,  which 
kept  open  the  routes  to  other  nations  holding  stocks  of 
gold,  and  to  one  important  source  of  production,  the  Rand 
in  South  Africa.  It  is  not  generally  realized  that  the  war 
has  not  reduced  the  output  of  gold  from  the  mines;  in 
fact,  it  has  even  increased.  In  the  calendar  year  1914 
the  total  for  the  world  was  $439,078,260,  in  1915,  $470,- 
466,214,  and  in  1916,  $457,006,045.  Of  this  total,  only 
about  $30,000,000  comes  from  Europe,  and  that  mainly 
from  Russia.  The  remainder  comes  from  North  America, 
South  America,  Australia,  Asia,  and  Africa,  accessible  to 
English  ships,  while  the  Central  Powers  yield  a  negligible 
amount.  From  Africa  alone  comes  over  $200,000,000  a 
year.     By  her  geographical  and  commercial  position  Great 


102  CREDIT  OF  THE  NATIONS 

Britain  had  a  commanding  advantage  for  maintaining 
the  integrity  of  her  monetary  and  credit  system.  To 
prevent  this  in  time  of  war  is  part  of  Germany's  demand 
for  the  "freedom  of  the  seas." 

The  stocks  of  gold  in  the  leading  reserves  of  the  world, 
July,  1914,  were  as  follows  (000,000  omitted) : 

CHIEF  GOLD  RESERVES 

Bank  of  England $190 

Bank  of  France 830 

Bank  of  Russia 800 

Reichsbank 340 

German  War  Reserve 50 

Bank  of  Austria-Hungary 255 

Treasury  of  the  United  States 1,184 

National  Banks  of  the  United  States 168 

Argentine  Caja 200 

Brazilian  Caja 50 

$4,067 

All  these  countries,  including  the  Dominion  of  Canada, 
suspended  gold  payment  except  Great  Britain  (including 
India  and  the  Cape)  and  the  United  States. 

The  visible  gold  holdings  of  the  British  Empire  are 
estimated  in  1916  as  about  $870,000,000.^ 

In  the  crisis  which,  as  we  have  seen,  threw  an  enormous 
burden  of  discounts  on  the  Bank  of  England,  was  there 
the  usual  accompaniment  of  both  an  internal  and  external 

*  (In  millions) 

Bank  of  England $256.6 

Currency  Note  Reserve 142.5 

Commonwealth  Bank 55.1 

New  Zealand  Banks  (about) 30.0 

Canadian  Central  Note  Reserve 11.7 

National  Bank  of  Egypt 35.6 

Indian  Gold  Standard  Reserve 25.7 

Indian  Note  Reserves 58.9 

Straits  Settlements  Note  Guarantee  Fund 3.9 

English,  Scotch,  and  Irish  Banks  (and  in  public  circulation),  about. , .  .     250.0 

\     

*     $870.0 
Cf.  E.  V.  Davies,  The  Finances  of  Great  Britain  and  Germany,  p.  51. 


ENGLISH   CREDIT  OPERATIONS  103 

drain  upon  her  gold  reserves  ?  Of  the  internal  demand,  we 
have  already  had  some  discussion;  it  was  chiefly  from  the 
joint-stock  banks.  Possibly  the  currency  notes  supplied 
needs  which  might  have  required  some  gold 
from  the  Bank.  But  as  regards  the  demand  for  control  of 
exportation,  the  peculiar  nature  of  a  war  with  ^°'^  °°  '^^' 
customer  countries  on  the  Continent  cut  off  shipments  to 
the  Continent,  except  in  a  small  way  to  France.  Later 
all  exports  of  gold  ceased.  It  was  argued^  that,  as  Eng- 
land was  a  creditor  nation,  to  whom  large  sums  were  due 
on  call  from  foreign  centres,  she  could  turn  the  tide  of 
gold  in  her  direction  by  so  simple  a  measure  as  refusing 
to  renew  maturing  loans  to  foreigners,  or  by  asking  for 
gold  in  payment  of  sums  to  her  credit  on  the  running  in- 
ternational account.  The  call  upon  the  United  States, 
for  example,  as  we  shall  see  later,^  was  unexpected  and 
painful,  yet  it  was  duly  responded  to;  but  other  countries, 
having  a  moratorium,  or  having  suspended  gold  payments, 
could  not  pay  in  gold.  Moreover,  German  war-ships  were 
at  sea  and  made  the  carriage  of  gold  very  hazardous  in 
the  early  part  of  the  war. 

In  order  to  overcome  the  risks  of  moving  gold  over  the 
seas,  vaults  for  receiving  gold  to  be  counted  in  the  be- 
longings of  the  Bank  of  England  were  established  in 
Ottawa  (Canada),  Johannesburg,  and  later  in    ^  ,, .   „    . 

,.  c^.  ,  .  1      Y     1  Gold  in  Bank 

Australia.  Since  nothing  had  been  men-  of  England 
tioned  in  the  Act  of  1844  as  to  the  location  of  '^•="*««^- 
the  reserve,  the  precedent  had  already  grown  up  of  reck- 
oning in  Bank  reserves  gold  at  the  mint;  and  this  practice 
was  now  extended  to  counting  as  reserves  gold  deposited 
to  the  credit  of  the  Bank  in  Canada  and  South  Africa. 
The  oflace  at  Ottawa  served  to  settle  dealings  between  Eng- 

^  Cf.  J.  N.  Keynes,  Quarterly  Journal  of  Economics,  November,  1914,  p.  49. 
2  Infra,  Chap.  VI,  §  6. 


104  CREDIT  OF  THE  NATIONS 

land  and  the  United  States,  and  that  in  Africa  was  con- 
veniently accessible  to  the  new  output  from  the  Rand.^ 
The  gold  reserve  of  £28,500,000  behind  the  currency  notes 
was  obtained  from  abroad.  Moreover,  gold  in  the  re- 
serves of  the  Indian  Government  was  transferred  to  the 
gold  reserves  of  the  Bank  of  England.  Thus  by  Septem- 
ber 19,  1914,  the  Bank  had  received  an  addition  to  its 
gold  of  nearly  $120,000,000.  Later,  after  the  example  of 
Germany  and  France,  the  Treasury,  on  August  8,  1915, 
instructed  the  post-office  and  all  public  departments  to 
use  notes  instead  of  gold;  and  it  requested  the  public  to 
pay  in  gold  to  the  post-office  and  the  banks,  to  ask  for 
notes  instead  of  gold  in  payment  of  checks,  and  to  use 
notes  rather  than  gold  in  payment  of  wages  and  all  cash 
disbursements. 

Under  these  conditions  the  gold  holdings  of  the  Bank 
nevertheless  steadily  increased  by  the  end  of  1914  to 
about  $350,000,000.  Since  then,  through  changes  in  the 
balance  of  trade  and  the  necessity  for  exporting  gold  to 
support  sterling  exchange,  the  stock  of  gold  has  been 
reduced  to  about  $250,000,000  or  less.  (See  Chart  II.) 
Keeping  in  mind  that  we  are  not  now  dealing  with  the 
reserves  of  the  banking  department,  which  are  mainly  in 
notes,  and  whose  percentage  to  deposits  is  stated  when 
the  reserves  of  the  Bank  are  reported  to  the  public  press, 
the  pivotal  question  is  the  maintenance  of  the  whole 
fabric  of  money  and  credit  on  the  gold  basis.  This  rests 
on  the  ability  to  get  gold  on  demand.  The  basic  fund 
is  that  in  the  issue  department  lying  behind  the  covered 
bank-notes  (above  £18,450,000).     That  gold  fund  is  now 

'  At  Ottawa  cash  on  London  for  gold  bars  is  given  at  the  rate  of  77s.  6d.,  and 
in  United  States  gold  coin  at  7Gs.  >^d.  At  the  office  in  South  Africa,  at  the 
rate  of  77s.  9d.  up  to  97  per  cent  of  the  deposit  of  gold,  the  balance  to  be  adjusted 
on  its  arrival  in  London.  C/.  J.  N.  Keynes,  Economic  Journal,  September, 
1914,  p.  476. 


ENGLISH  CREDIT  OPERATIONS  105 

(1917)   absolutely  higher  than  in  July,   1914,  by  $86,- 
000,000. 

How  this  general  result  has  been  accomplished  is  not 
perfectly  clear.     At  the  start  there  was  an  evident  vacil- 
lation on  the  part  of  some  of  the  joint-stock  banks  as  to 
the  maintenance  of  gold  payments,   and   an 
attempt,  as  said,  was  made  to  bring  the  Bank     Redemption 

rrM  1  (•  •'^  sold  not 

to  that  view.  Ihe  steady  movement  oi  new  whoUy  free. 
gold  into  the  hands  of  the  Bank,  the  absence 
of  all  demand  for  the  Continent,  have  obviously  enabled 
the  Bank  to  use  great  sums  to  protect  exchange  and  yet 
to  keep  the  home  situation  fairly  secure.  Doubtless, 
there  is  a  general  understanding  that  it  would  not  be 
patriotic  to  demand  gold  from  the  Bank.^  So  long  as  this 
situation  is  maintained,  no  perceptible  depreciation  will 
take  place;  but  immediate  redemption  in  gold,  in  the  strict 
sense,  probably  does  not  exist,  when  English  bills  of  ex- 
change remain  at  a  discount  of  about  2  per  cent  in  the 
New  York  market. 

§  6.     Out  of  the  rough  school  of  war  some  lessons  in 
the  adjustment  of  capital  and  credit  to  new  and  surprising 
conditions  seem  to  be  emerging.     The  sudden 
crisis  on  the  outbreak  of  war,  which  stopped       to  war 

,1  1  .•  p  i?ii*  ij?j.         conditions. 

the  normal  operations  oi  peaceiul  business,  leit 

the  future  very  uncertain.     But  quite  as  truly  as  there 

^  It  has  been  said  that  gold  is  in  free  circulation,  and  that  its  export  is  not 
prohibited.  But  Mr.  E.  L.  Franklin  is  quoted  by  Kirkaldy  (Credit,  Industry 
and  War,  p.  249)  as  saying:  "At  the  present  time,  notwithstanding  that  there 
is  no  prohibition  placed  on  the  export  of  gold  to  neutral  countries,  no  bank  or 
banker  can  be  found  who  will  avail  himself  of  the  benefits  accruing  from  such 
transactions,  because  it  is  the  general  opinion,  whether  justified  or  not  I  will 
not  say,  that  it  is  against  the  interests  of  this  country  for  gold  to  leave  Eng- 
land, so  long  as  other  governments  do  not  allow  gold  exports  from  their  coun- 
tries." It  is  certain  that  free  exports  of  English  gold  to  some  neutral  countries 
would  have  gone  to  swell  German  reserves.  It  would  have  been  different  with 
exports  to  the  United  States. 


106  CREDIT  OF  THE   NATIONS 

is  one  normality  of  credit  in  times  of  peace,  so  there  is 
one  in  times  of  war.  The  period  between  the  break  with 
peace  and  the  final  adjustment  to  war  is  one  of  stress  and 
uncertainty.  Nevertheless,  in  war  there  is  a  possible 
normality  of  trade  and  credit  as  soon  as  a  certain  adjust- 
ment is  reached.  The  crisis  on  the  outbreak  of  war  is 
not  the  end  of  the  world,  nor  of  so-called  prosperity.  The 
old  gives  way  to  something  different;  but  the  principles 
at  work  are  not  different. 

A  striking  example  of  the  reconstruction  of  credit  out 

of  a  period  of  confusion  is  given  in  the  course  of  events 

arising  from  the  operations  of  the  Bank  of  England.     (See 

Chart  II.)     These  operations  present  the  inner 

Stress  shown  i-iTr.         pi  t  p    /-^ 

in  bank  and  Vital  lile  oi  the  credit  sj'stem  oi  Great 

accounts.  Britain,  and  are  well  worth  more  detailed 
study  than  we  can  give  them  in  our  general  treatise. 
Only  large  results  can  be  here  noticed.  At  once  there  is 
presented  to  the  eye  unmistakably  that  the  first  period, 
that  of  stress  and  uncertainty,  continued  until  November, 
1915;  and  that  the  second  period,  that  of  attained  adjust- 
ment to  new  conditions,  has  steadily  continued  to  1917. 
What  the  manifestations  may  be  in  the  final  adjustment 
from  war  to  peace,  or  whether  they  may  form  a  third 
period,  cannot  now  be  affirmed. 

In  the  early  part  of  the  first  period  the  dislocation  of 
trade  was  great  (see  Chart  II),  but  not  as  drastic  as  in 
later  months.  The  industries  immediately  affected  were 
j.^j  the   fisheries,    coal,    steel,    linoleum,    jewelry, 

dislocation  diamonds,  and  ostrich  feathers  (South  Africa), 
sugar,  linen,  cotton,  woollen  goods,  and  ship- 
ping. Since  one-quarter  of  the  normal  English  trade  had 
been  in  the  North  Sea  and  the  Baltic,  and  that  with  Ger- 
many alone  had  amounted  to  $550,000,000  annually,  in- 
terruptions to  business  were  severe  and  general.     Early 


ENGLISH   CREDIT  OPERATIONS  107 

in  September,  1914,  the  Lancashire  textile  operations 
were  at  a  standstill.  Inasmuch  as  four-fifths  of  the  out- 
put of  cotton  goods  were  for  export,  the  demoralized  con- 
dition of  foreign  markets  hit  hard  at  home  prosperity. 
The  shipyards  were  idle.  There  was  much  unemploy- 
ment. A  few  German  war-ships  were  still  raiding  Eng- 
lish commerce  in  the  South  Atlantic.  A  considerable 
North  Sea  trade  was  still  going  on,  although  rates  for 
freight  and  insurance  were  very  high.  At  that  time  the 
busiest  ports  in  Europe  were  Christiania  and  Gothenburg, 
which  drew  large  cargoes  and  gained  rich  returns.  A 
large  trade  to  Hamburg  was  carried  on  by  way  of  Sweden 
and  Norway.  In  August,  1914,  under  the  alien's  restric- 
tion order,  German  banks  in  London  were  granted  licenses, 
but  with  such  strict  limitations  that  they  were  practically 
obliged  to  liquidate.^ 

The  dislocation  of  English  foreign  trade  by  the  end  of 
1914  has  been  thus  summarized  by  Bowley:^ 

During  the  five  months  beginning  August,  1914,  less  than 
two  weeks'  imports  was  lost  from  the  Empire,  and  from  non- 
belligerent foreign  countries,  and  that  even  of  this  much  was 
simply  delayed  by  congestion  at  the  docks.  The  enemy's  efforts 
to  check  our  supplies  from  countries  not  actually  at  war  have 
thus  had  less  effect  than  a  minor  trade  crisis  and  about  as  much 
as  a  moderately  serious  strike  of  transport  workers. 

With  exports  .  .  .  the  position  is  different.  .  .  .  Judging 
from  the  trade  of  December,  1914,  and  January,  1915,  the  scale 
of  our  exports  of  home  produce  has  shrunk  so  as  to  cause  a 
diminution  (if  there  is  no  change)  of  about  £230,000,000  per 
annum,  of  which  £100,000,000  is  due  to  loss  of  trade  with  Ger- 
many, Austria,  Turkey,  Belgium,  and  Russia;  re-exports  have 

*  Three  branches  of  German  banks  in  London — those  of  the  Deutsche,  Dres- 
dner,  and  Disconto  Gesellschaft — were  forbidden  to  open  on  August  7,  1914. 

*  A.  L.  Bowley,  The  Effect  of  the  War  on  the  External  Trade  of  the  United 
Kingdom,  1906-1914,  (1915),  pp.  53-54. 


108 


CREDIT  OF  THE   NATIONS 


also  diminished;  meanwhile  imports  approximate  to  their  old 
level  of  value.  .  .  . 

The  excess  of  the  value  of  imports  over  that  of  exports  will 
tend  to  reach  £350,000,000  or  £400,000,000  a  year.  So  far  as 
can  be  judged  this  total  is  little  if  at  all  more  than  the  amounts 
due  as  interests,  profits,  etc.,  from  abroad,  together  with  the 
high  earnings  of  shipping,  which  at  once  cause  part  of  the  excess 
and  help  to  meet  it.  .  .  . 

Finally,  it  appears  that  our  dependence  on  foreign  and  colo- 
nial supplies  and  our  possible  vulnerability  at  sea  have  had  as 
yet  hardly  any  visible  effect  on  our  production  or  consumption; 
for  prices  must  rise,  credit  be  temporarily  disorganized,  capital 
cease  to  accumulate,  production  be  checked  and  industry  di- 
verted, in  any  country  engaged  in  a  serious  war,  whether  it  be 
insular  or  continental,  trading  or  self-sufficient. 

The  subsequent  course  of  English  foreign  trade  was  as 
follows  (in  millions): 


Imports  less 
re-exports 

Exports 

Excess  of 
impKirts 

1914,  July-December 

1915,  January-June 

191.5,  .Julv-Decerabcr 

£284.7 
377.8 
377.7 
420.8 
430.1 
456.7 

£174.8 
183.7 
201.0 
241.8 
264.4 
251.1 

£109.9 
194.1 
176.7 
179.0 
165.7 
205.6 

1916,  January-June 

1916,  July-December 

1917,  January— June 

Totals,  three  years 

£2,347.8 

£1,316.8 

£1,031.0 

The  trade  for  the  first  three  years  of  war  may  be  seen 
month  by  month  in  Chart  III.  It  is  not  clear  whether  or 
not  the  lapses  in  1917  for  both  imports  and  exports  are 
in  any  waj^  assignable  to  the  submarine  warfare.  In 
May,  1917,  however,  imports  were  at  the  high  point  of 
the  war. 

It  was  the  collapse  of  trade  at  home  which  supplemented 
the  cri.sis  due  to  the  inability  of  foreigners  to  meet  their 
pre-moratorium  bills,   and   hence  reduced  the   domestic 


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ENGLISH  CREDIT  OPERATIONS  109 

bills  offered  in  the  money  market.  Manufacturers'  orders 
had  ceased  in  August  (except  for  government  contracts), 
hence  the  need  of  loans  to  cover  existing  obligations. 
The  shortage  in  normal  business  explains  why  ^^^j 
the  bill  market  did  only  5  per  cent  of  its  usual  coUapse  of 
peace  transactions.  Because  of  the  needed 
loans,  deposits  (arising  from  loans)  were  higher  at  the 
end  of  September  than  at  the  end  of  July,  1914.  (See 
Chart  II.)  Mr.  Lloyd-George  was  impatient  that,  after 
the  load  of  pre-moratorium  bills  had  been  taken  off  by 
the  Bank  of  England,  the  banks  did  not  discount  more 
freely.  In  truth,  the  basic  movement  of  goods  from 
which  bills  arose  was  not  going  on.^  Normality  could 
not  return  until  goods  began  to  move  normally.  As  soon 
as  the  ocean  was  cleared  of  enemy  ships  goods  began  to 
move,  but  in  new  directions.  The  diversion  of  produc- 
tive power  into  the  making  of  munitions  of  war  soon 
stopped  all  unemployment.  The  purchase  of  supplies 
abroad,  especially  from  Canada  and  the  United  States, 
began  on  an  unexampled  scale;  so  that  exports  and  im- 
ports, reckoned  at  the  steadily  increasing  prices,  mounted 
high  and  absorbed  all  free  mercantile  tonnage.  While  a 
very  considerable  part  of  the  pre-moratorium  bills  were 
being  slowly  liquidated  by  the  drawers,  there  was  a  ten- 
dency of  discounts  (see  the  line  of  "other  securities")  to 
fall;  but  new  requirements,  notably  in  connection  with 
the  subscriptions  to  the  national  debt,  and  the  mobiliza- 
tion of  foreign  securities,  had  the  effect  of  raising  the 
total  discounts.  The  countries  like  Canada,  South 
Africa,   South  America,   China,   and   Japan,   which  had 

*  Professor  J.  N.  Keynes  takes  the  view  that  new  movements  of  goods  could 
not  take  place  because  of  the  "difficulty  of  drawing  bills,  capable  of  being  dis- 
counted," i.  e.,  because  the  accepting  houses  were  not  in  a  position  to  do  new 
business.  "  War  and  the  Financial  System,"  August,  1914,  Economic  Journal, 
vol.  24,  p.  467. 


110  CREDIT  OF  THE   NATIONS 

been  supplied  with  capital  for  building  their  railways 
and  public  works,  could  no  longer  expect  to  borrow 
from  London,  for  English  savings  went  into  the  war 
loans. 

War  inevitably  interferes  with  the  normal  movement 
of  capital  to  its  predestined  occupation.     It  can  no  longer 
go  as  formerly  to  enemy  countries  for  investment  and 
profit,   and   the  arrested   activity   of  neutral 
on  the  countries  offers  less  opportunity  for  its  use. 

mobiuty  of       j|-  ^^^  ^j^  nothing  without  trained  and  accept- 

capital.  '^  .  .  '^ 

able  labor;  but  the  diversion  to  war  of  men 
from  every  industry  lessens  the  outcome  of  the  joint 
efforts  of  capital  and  labor.  The  swift  change  in  the 
demand  from  articles  of  peaceful  consumption  to  those 
of  unusual  character  and  on  an  unbelievable  scale  of 
production  introduces  the  element  of  risk  in  a  situ- 
ation which  every  one  knows  cannot  be  permanent.  In 
the  state  of  mind  engendered  by  such  uncertainty,  the 
production  of  munitions  goes  on  feverishly  because  of 
necessity,  but  no  new  enterprises  reaching  out  into  the 
future  can  obtain  the  use  of  capital.  Then  the  borrow- 
ings of  the  government  on  a  colossal  scale  soak  up  the 
capital  which  might  have  retained  an  industrial  use;  and, 
if  desirous  of  subscribing  to  a  public  loan,  the  owner  of  a 
security  finds  that  unexpected  readjustments  of  estab- 
lished investments  to  a  rising  rate  of  interest  have  made 
violent  changes  of  price  in  the  markets,  so  that  his  de- 
preciating holdings  can  be  sold  only  at  a  loss.  Even  the 
long-kept  bundles  of  foreign  securities  are  forced  out  of 
the  strong  boxes  to  be  sold  in  order  to  support  a  nation's 
credit.  While,  before  him,  all  the  time  looms  the  spectre 
of  a  new  upheaval  of  prices  and  uncertainty,  when  it 
shall  become  necessary  to  make  the  adjustment  to  the 
difficulties  following  the  close  of  war.     No  longer  is  it 


ENGLISH  CREDIT  OPERATIONS  111 

possible  to  provide  the  needed  capital  at  home  and  yet 
satisfy  the  eager  demands  of  newer  lands  accustomed  to 
borrow  capital  for  their  own  development.  Indeed,  it 
may  be  a  serious  question  whether  the  usual  forms  of 
capital  at  home,  such  as  those  invested  in  railways  and 
plants  can,  under  the  wear  and  tear  of  excessive  use,  be 
kept  intact  under  the  strenuous  exactions  of  war. 

How  sound  was  the  substructure  under  this  credit 
situation  .f^  Credit  obligations  on  a  very  large  scale  en- 
tered into  in  terms  of  money  must  be  met  sooner  or 
later   according   to   the  bond.      Could   it  be    „      ,         . 

°  _  ^       Soundness  of 

done.^^  While  in  theory  every  maturing  obli-  English 
gation  had  to  be  paid  in  money,  yet  they  were 
met  in  fact  by  an  acceptable  means  of  payment  sup- 
plied by  credit  devices.  Normally,  the  test  of  solvency 
for  the  vast  body  of  credit  transactions  has  been  applied 
through  a  steady  repayment  by  the  proceeds  arising  out 
of  the  production  and  sale  of  goods.  But,  as  a  result  of 
the  crisis,  a  heavy  burden  of  pre-moratorium  bills  had 
been  taken  over  by  the  Bank  of  England;  these  bills,  un- 
liquidated, were  dead  assets  on  which  a  deposit-currency 
of  practically  equal  amount  had  been  created  as  a  means 
of  payment  between  members  of  the  community.  Did 
the  guarantee  of  the  government  to  protect  the  Bank 
against  loss  on  these  assets  give  them  life  ?  The  govern- 
ment turned  over  no  proceeds  from  goods  produced  and 
sold.  It  only  gave  a  promise  of  proceeds  due  to  the 
power  of  the  state  to  levy  taxes  in  the  future.  Thus  a 
considerable  part  of  the  current  means  of  payment  pro- 
vided by  the  Bank  of  England  depended  upon  future 
goods.  It  was  as  if  a  temporary  scaffolding  of  timber  had 
been  inserted  into  a  gap  caused  by  the  destruction  of  a 
section  in  a  great  steel  bridge  over  which  a  stream  of 
trains  must  constantly  pass.     Was  it  safe?     Obviously, 


112  CREDIT  OF   THE   NATIONS 

it  was  not  intended  to  be  permanent.  In  this  time  of 
transition  it  was  the  function  of  the  English  credit  or- 
ganization to  provide  borrowers  with  a  sufficient  means 
of  payment  acceptable  to  creditors,  whether  a  certain 
part  of  its  assets  were  ever  made  liquid  or  not. 

But  was  there  any  serious  risk  in  creating  such  an  im- 
mediate means  of  payment  on  the  promise  of  future 
goods  ?  Of  course  the  Bank  itself  was  protected  against 
^   ,.  any  loss  to  its  assets.     It  is  the  function  of 

Credit  gave  *'   _ 

time  for  Credit,  howcvcr,  to  provide  present  means  of 

iqm  ation.  payment  and  take  the  risk  of  a  repayment  in 
the  future.  Futurity  is  the  very  essence  of  credit.  To 
a  well-established,  going  concern  credit  is  legitimately 
given  on  the  basis  of  goods  not  yet  finished  but,  humanly 
speaking,  certain  to  come  forward  in  due  course.  The 
institution  giving  credit  forms  its  own  judgment  as  to 
this  certainty  and  assumes  the  risk.  It  is  the  uncertainty 
that  may  be  injected  which  gives  the  risk  a  greater  force. 
The  risk  of  short-term  paper  is  quickly  tested;  b'ut  not 
so  with  a  credit  running  long  into  tlie  vicissitudes  of  a 
war-stricken  future.  When  it  is  considered  that  five  or 
more  of  the  richest  nations,  with  half  the  population  of 
the  world,  were  devoting  all  their  energies  to  destruction, 
rather  than  to  production  of  goods  for  normal  purposes, 
one  can  understand  that  the  customary  currents  of  de- 
mand for  staple  goods  would  be  stopped  at  home  and 
abroad.  Losses  were  accepted  and  makeshifts  resorted 
to  in  attempts  to  meet  obligations.  Hence  the  need  of 
discounts  to  gain  time  and  to  make  readjustments.  Such 
recourse  the  organization  of  credit  supplied  in  this  period 
of  gusts  and  uncertainty  lasting  to  November,  1915. 
From  March,  1915,  to  November,  1915,  the  excess  of 
discounts  over  deposits  (see  Chart  II)  shows  a  time  of 
great  pressure,  greater  even  than  at  the  very  outbreak 


ENGLISH  CREDIT  OPERATIONS  113 

of  the  war.  It  is  clear  that  the  remedies  adopted  to  meet 
the  crisis  had  not  been  such  as  thoroughly  to  complete 
the  task.  The  free  and  normal  activity  of  credit  was  not 
yet  doing  its  perfect  work.  Much  of  the  unliquld  assets 
had  been  released,  to  be  sure,  but  so  long  as  emergency 
measures  remained  in  force  they  constituted  a  proof  of 
the  greater  or  less  abnormality  of  credit  conditions.  As 
early  as  November  27,  1914,  the  chancellor  of  the  ex- 
chequer reported  that  the  total  of  the  bills  discounted  by 
the  Bank  of  England,  and  which  had  been  guaranteed  by 
the  government,  amounted  to  about  $600,000,000.  In- 
asmuch as  the  volume  of  bills  impending  over  the  mar- 
ket at  the  height  of  the  crisis  was  treble  that  sum,  it 
was  evident  that  very  large  amounts  of  bills  had  been 
taken  up  in  due  course.  Herein  lies  the  real  test  of  the 
character  of  English  credit.  If  the  transactions  were  of 
a  nature  to  liquidate  themselves  for  the  most  part,  the 
foreign  bills  whose  drawers  had  been  hopelessly  caught  in 
the  swirl  of  war  could  be  carried  through  to  times  of  peace 
and  allowed  time  for  recovery. 

In  its  wider  meaning  the  piling  up  of  a  great  war  debt 
is  a  means  of  putting  off  to  a  longer  future  the  repayment 
of  the  sums  used  in  destructive  war  operations.  Credit 
has  enabled  the  nation  to  discount  its  future  Need  of 

industrial   capacity  in  return  for  the  means  present 

of  present  payment,  but  the  vacuum  of  lost  ^°°  ^' 

goods  must  be  filled  again  before  real  liquidation  can  ever 
be  accomplished.  But  Great  Britain  has  had  an  advan- 
tage of  importance  in  its  keeping  open  the  Atlantic  trade 
(however  minimized  later  by  the  submarine),  thereby 
supplying  its  demand  for  present  goods  which  its  own 
capital  and  labor,  given  over  largely  to  war  industries, 
could  not  produce  in  the  quantity  needed.  That  is,  by 
the  mobilization  of  American  securities  held  by  English- 


114  CREDIT  OF  THE  NATIONS 

men  they  could  fro  tanto  be  returned  to  us  in  exchange 
for  goods  imported  into  England.  A  liquidation  in  goods 
was  therefore  going  on  with  the  severance  from  English 
owners  of  a  large  volume  of  investmentSo  Thereby  the 
English  credit  situation  was  somewhat  strengthened. 

The  general  result  may  be  observed  in  Chart  II  during 
a  period  of  sustained  steadiness  in  credit  transactions, 
even  at  a  higher  level,  which  has  continued  since  Novem- 

rmaiitv  of  ^^^»  1915.  The  adjustment  of  the  foreign  ex- 
credit  in  changes  to  the  altered  relation  of  American 
war-  me.  exports  and  imports  forms  a  part  of  the  re- 
organization of  credit  in  this  period.  There  had  been 
reached,  as  nearly  as  it  can  be,  what  may  be  described 
as  the  normality  of  credit  during  a  time  of  war. 

The  solidity  of  the  fabric,  being  thus  referred  to  the 
outcome  of  future  events,  is  finally  made  dependent  on 
the  prospective  industrial  efficiency  of  the  whole  nation. 
During  the  period  of  war  there  can  be  no 
cr^e^Tt^  °^  doubt  of  the  vastly  greater  productivity  of 
depends  on  the  labor  forcc,  aided  by  those  not  formerly 
production.  Workers  and  the  stimulated  energy  of  all  in- 
dustrial management,  in  the  work  of  making 
war  supplies.  The  completed  liquidation  after  the  war 
is,  then,  mainly  a  question  of  the  quality  of  industrial 
efficiency  which  will  issue  from  past  traditions  mingled 
with  the  unmistakable  stimuli  due  to  the  war.  Without 
doubt  the  productive  factors  will  be  more  active  after 
than  before  the  war.  The  basis  of  English  credit  must 
be  gauged  accordingly. 

§  7.  The  creation  of  a  new  precedent  in  the  issue  of 
government  paper  money,  even  though  supported  by 
a  small  gold  reserve,  started  an  inevitable  discussion  on 
the  principles  of  money  and  credit  which,  in  the  end. 


ENGLISH  CREDIT  OPERATIONS  115 

may  be  as  extended  as  that  on  the  depreciation  of  bank- 
notes during  the  restriction  period.  The  currency  notes 
gave  rise  to  the  fear  of  inflation;  and,  as  credit  appeared 
as  purchasing  power,  to  the  effect  of  money 
was  also  joined  the  effect  of  an  extension  of  iiXtion. 
bank  credit,  as  measured  by  the  increased 
volume  of  deposits  (arising  from  loans).  That  inflation 
had  followed  was  assumed  because  of  an  admitted  rise 
in  the  prices  of  many  goods.  Inflation  and  rising  prices 
were  regarded  as  twin  children  of  an  increasing  volume 
of  money  and  credit.     Such  were  the  assumptions. 

As  to  the  fact  of  a  rise  of  prices  there  can  be  no  doubt. 
There  have  always  been  objections  to  the  use  of  both  the 
Sauerbeck  and  Economist  tables  of  prices  as  evidence  of 
a  change  in  the  general  price  level,  because 
they  are  both  limited  to  a  narrow  range  of  ris?of  prices, 
commodities,  the  former  mainly  to  extractive 
products  (45),  and  the  latter  to  only  22  commodities,  in 
which  cotton  has  too  large  an  influence.*  Nevertheless, 
these  tables,  with  their  limitations,  provide  the  only  avail- 
able English  data  at  the  present  time.  In  the  Sauerbeck 
table,  starting  from  an  index  number  of  85  (the  average 
in  each  year,  1912,  1913,  and  1914),  the  rise  had  reached 
168  in  March,  1917,-  or  an  increase  of  98  per  cent.  That 
is,  in  a  group  of  vegetable  and  animal  food,  sugar,  coffee, 
and  tea,  minerals,  materials,  and  textiles,  the  prices  on 
the  average  had  practically  doubled.  In  the  Economist 
table,  from  the  end  of  July,  1914,  to  the  same  date  in 
1917,  the  rise  was  106  per  cent;  or,  to  September,  1917, 
even  to  120  per  cent.  Without  much  question  there 
may  be  assumed  a  rise  of  100  per  cent  in  most  prices. 

^  Cf.  Laughlin,  Principles  of  Money,  pp.  175-190. 

-  See  Royal  Statistical  Journal,  March,  1917,  p.  291,  for  wholesale  prices  in 
1916,  continued  by  the  editor  of  the  Statist,  Sir  G.  Paish. 


116  CREDIT  OF  THE   NATIONS 

A  statement  of  the  mere  facts  as  to  the  rise  in  the  level 

of  prices,  however,  conveys  no  explanation  whatever  as 

to  the  causes  which  have  produced  that  rise.     To  assume 

^._  that  because  there  has  been  a  rise  of  prices  it 

Quantity  .    „      .  „ 

theory  caUed  must  be  duc  to  an  inflation  of  money  and 
"^'  credit,  assumes  all  the  questions  at  issue.     It 

takes  for  granted,  as  a  premise,  the  truth  of  the  obsolete 
quantity  theory  of  money — which  cannot  be  granted.  A 
typical  expression  of  this  view  during  the  English  discus- 
sion may  be  given  as  follows : 

Price  is  a  function  of  two  variables :  it  varies  directly  in  pro- 
portion to  the  supply  of  money  of  all  kinds  and  inversely  in 
proportion  to  the  quantity  of  goods  or  transactions  to  be  han- 
dled by  money. ^ 

This  view  omits  some  important  elements  lying  in  the 
very  definition  of  price.  To  most  economists  price  has 
been  the  ratio  of  exchange  between  goods  and  some  stand- 
ard money.  For  instance,  the  price  of  a  ton  of 
involved.  stGel  is  the  quantity  of  gold  for  which  it  will 
exchange.  If  so,  the  price  of  steel,  or  of  any 
commodity,  is  (to  be  accurate)  a  function  of  two  variables : 
the  forces  affecting  the  value  of  the  standard  money  and 
those  affecting  the  production  and  marketing  of  steel. 
To  omit  the  latter  and  to  assume  one-sidedly  that  prices 
are  influenced  solely  by  forces  on  the  money  side  of  the 
price  ratio  is  to  overlook  half  the  problem.  In  the  view 
above  given  the  two  variables  there  mentioned,  if  true 
at  all,  concern  only  one  of  the  factors  in  price-making. 
Who  does  not  know  that  the  price  of  steel  has  been 
lowered  by  inventions  and  cheapening  processes,  quite  in- 
dependent of  the  demand  for  or  the  supply  of  gold  ? 

'  In  the  address  of  Professor  H.  S.  Foxwell,  on  "Inflation,"  printed  in  The 
Insurance  Record,  March  30,  April  6,  and  April  13,  1917. 


ENGLISH   CREDIT  OPERATIONS  117 

But  the  burden  of  the  case  has  been  transferred  to 
credit.  Much  has  been  wanting  in  precision  when  money 
and  credit  have  been  introduced  into  the  exposition  of  the 
more  modern  quantity  theory.  In  the  main,  it 
is  assumed  that  credit  has  the  same  effect  on  cre^tl^"^" 
prices  as  money.  If  loans  at  banks  are  ex- 
panded, inflation  can  appear,  it  is  said,  and  of  course  prices 
would  rise.  If  prices  have  risen,  it  is  taken  for  granted 
that  there  must  have  been,  if  not  an  inflation  of  money, 
then  an  inflation  of  credit.  Such  a  view  is  quite  as  one- 
sided as  the  other.^  It  eliminates  all  forces  affecting  the 
goods  themselves  in  the  price  ratio.  It  crowds  under  the 
phrase  "other  things  being  equal"  factors  touching  price 
which  have  far  more  practical  importance  than  the  volume 
of  money  or  credit.  The  elements,  like  rising  wages  for 
the  same  productive  effort,  entering  into  the  expenses  of 
producing  goods  are  ignored.  Such  theorizing  has  not 
enough  of  practical  utility  in  it  to  live. 

To  argue  that  because  there  has  been  a  rise  of  prices 
it  must  be  due  to  an  inflation  of  money  or  credit  is  a  com- 
plete non  sequitur.  Nor  is  it  any  more  possible  to  prove 
the  relation  statistically  by  showing  a  corre-  Rjggof  jice 
spondence  between  the  volume  of  money  or  not  due  to 
credit  and  the  change  of  prices  than  it  would 
be  to  tabulate  the  cases  of  sore  throat  to  explain  the 
spread  of  diphtheria.  To  compare  the  statistics  of  price 
with  those  of  money  and  credit  and  to  argue  from  a  cor- 
respondence that  one  is  the  cause  of  the  other  is  to  assume 
at  the  start  the  validity  of  the  theory  which  it  is  attempted 
to  prove.  Moreover,  if  the  causes  of  a  rise  of  prices  are 
to  be  shown  statistically,  then  let  all  the  facts  of  labor, 

^  Cf.  supra.  Chapter  II,  pp.  63,  68.  For  a  more  extensive  examination  of  the 
relation  of  credit  to  prices,  see  Laughlin,  Principles  of  Money,  chaps.  IV,  VIII, 
and  IX,  or  pp.  110,  125-128,  136,  247,  314-321. 


118  CREDIT  OF  THE   NATIONS 

wages,  eflSciency,  costs  of  materials,  freights,  skill  of  man- 
agement, machinery,  new  processes,  taxation,  insurance, 
and  the  like,  which  are  affecting  the  expense  of  producing 
every  known  commodity,  be  also  introduced  into  the  in- 
vestigation. The  causes  affecting  the  level  of  prices  are 
too  many  and  too  complicated  to  be  explained  by  a  mere 
rule  of  thumb  applying  only  to  a  single  factor  like  the 
quantity  of  money  or  of  loans. 

Inflation  obviously  connotes  an  increase  either  in 
money  or  credit.  Sometimes  it  is  used  to  explain  a  de- 
preciation of  the  currency.  But  an  attempt  to  increase 
the  volume  of  money  or  credit  when  there  is 
prices  due  to  quick  and  immediate  redemption  in  gold,  or 
depreciation     jy^^  payment  on  maturity  of  all  bills,  would 

of  money.  ...  . 

carry  with  it  its  own  correction:  par  would 
always  be  maintained,  and  the  quantity  outstanding 
would  be  automatically  adjusted  to  the  needs  of  the  pub- 
lic. The  quantity  of  money  or  credit  could  not  thus  be 
depreciated,  unless  with  the  unregulated  increase  of  vol- 
ume there  went  a  cessation  of  immediate  redemption  in 
gold.  In  such  a  case,  charge  the  depreciation  to  inconvert- 
ibility. Not  infrequently  compilations  have  been  made 
of  the  increase  of  note-issues  since  the  war  began  by  Ger- 
many, France,  Russia,  Italy,  Great  Britain,  and  the  neu- 
trals to  show  that  the  increase  of  the  fiduciary  circulation 
has  been  twelvefold,  with  the  intent  to  explain  the  rise 
of  prices  in  all  these  countries.  Here  is  the  obvious  mis- 
take of  ignoring  the  effects  of  giving  up  convertibility  of 
the  notes  in  Germany,  France,  Russia,  and  elsewhere.  If 
immediate  redemption  in  gold  be  abandoned,  then,  of 
course,  depreciation  can  set  in  to  any  extent.  When  the 
standard  of  prices  depreciates,  prices  must  inevitably  rise 
to  an  equivalent  or  even  greater  extent,  whether  the  in- 
crease in  the  issues  be  large  or  small,  or  none  at  all.     The 


ENGLISH  CREDIT  OPERATIONS 


119 


cause  lies  not  in  the  volume  of  the  issues,  but  in  the  want 
of  redemption.  Inconvertibility  has  been  a  main  factor 
in  the  depreciation  of  the  German  mark  and  the  Russian 
rouble.  In  England  there  is  what  has  been  termed  "re- 
striction by  consent,"  since  it  was  not  possible  to  export 
gold  unoflScially.  But  there  is  no  evidence  of  any  depre- 
ciation of  currency  notes  relatively  to  gold,  or  the  exist- 
ence of  paper,  as  distinct  from  gold,  prices.  If  so,  the 
volume  of  note-issues  could  not  have  caused  any  change 
of  prices  different  from  those  established  on  the  gold 
standard. 

The  actual  increase^  of  the  notes  of  the  Bank  of  Eng- 
land shows  no  inflation,  since  it  is  accompanied  by  a  cor- 
responding increase  in  the  cover  of  gold.  In  the  case  of 
the  currency  notes,  after  subtracting  the  gold 
reserve  behind  them  ($142,500,000)  there  is  a  cSatioL'! 
clear  addition  to  the  circulation  of  $761,000,- 
000.  But  the  joint-stock  and  private  banks  of  Great 
Britain  have  increased  their  cash  and  money  at  call  by 
$570,000,000;  so  that,  apart  from  displacing  small  gold 
in  circulation,  a  very  large  part  of  the  currency  notes 
must  have  found  a  resting-place  in  bank  reserves.  So 
far  as  concerns  the  circulation  in  the  hands  of  the  public, 
there  seems  little  evidence  of  redundance. 


'  (In  millions) 


July  29,  1914 

October  3.  1917 

Bank  of  England  notes 

$275 

236 
(1914) 
4,475 

$359 
761 

492 
(1916) 
5,774 

Currency  notes 

Bank  of  England  loans  (other  se- 
curities)   

Joint-stock  banks  (deposits) 

The  figures  for  the  joint-stock  banks  are  the  yearly  returns.     Cf.  London 
Economist,  May  19,  1917,  p.  863. 


120  CREDIT  OF  THE  NATIONS 

But  have  the  increased  bank  reserves  led  to  an  infla- 
tion of  credit?     Combining  the  loans  of  the  Bank  of 
England   with   those   of   the   English   joint-stock   banks 
(using  deposits  as  a  measure),  there  has  been 

called  that  a  considerable  part  of  these  dis- 
counts have  been  made  on  pre-moratorium  bills  not  yet 
liquidated,  the  total  increase  in  three  years  does  not  seem 
significant  of  inflation.  Certainly  there  is  nothing  which 
could  be  appealed  to  as  the  cause  of  a  rise  in  prices  of  100 
per  cent.  Nor  can  it  be  inferred  from  these  figures  that 
the  loans  of  the  banks  to  subscribers  for  national  loans  has 
created  a  huge  fictitious  purchasing  power  which  has  car- 
ried up  the  level  of  prices.  If  such  loans  have  been  made, 
they  must  have  been  liquidated  largely  from  time  to  time. 
So  far  as  inflation  is  concerned,  an  examination  of  Chart 
II  shows  that  at  the  Bank  of  England  after  the  middle 
of  1916  discounts  never  but  once  exceeded  deposits.  In- 
deed, the  obvious  inference  from  the  operations  of  the 
Bank  in  this  chart  after  the  end  of  October,  1915,  is  that 
there  has  been  a  decline  or  steadiness  of  discounts.  The 
previous  time  of  upheaval  was  distinctly  left  far  behind.^ 
The  logical  outcome  of  our  inquiry  makes  it  necessary 
to  find  a  cause  for  the  admitted  rise  of  prices  outside  of 
the  supposed  expansion  of  the  currency  or  credit.     Causes 

enough  lie  ready  at  hand  in  the  events  of  war. 
expiained"'^^^    ^^^^  dislocation  of  exports  and  imports,  the 

scarcity  of  shipping,  the  high  freights,  the 
cutting  off  from  normal  sources  of  supply  on  the  Conti- 
nent, the  reduction  of  the  North  Sea  trade,  the  shortage 
of  the  world's  crops,  would  alone  have  explained  the  high 
prices  of  many  products  in  English  markets.  But  un- 
questionably the  main  effect  of  the  war  in  raising  the  cost 

'  Cf.  infra,  pp.  139-140. 


ENGLISH  CREDIT  OPERATIONS  121 

of  living  and  the  general  level  of  prices  was  the  with- 
drawal of  the  laboring  force  to  the  fighting-lines,  with  the 
necessity  of  paying  exceptionally  high  wages  to  an  army 
of  workers  in  the  munition  factories,  and  hence  a  rise 
^f  the  scale  in  all  other  industries.  All  raw  materials — 
coal,  copper,  iron,  and  steel,  rubber,  dyes,  chemicals, 
sugar,  wool,  and  cotton — in  addition,  rose  to  high  prices. 
Taxes  increased.  In  fact,  every  item  entering  into  the 
production  and  marketing  of  all  kinds  of  goods  felt  the 
upward  movement  of  higher  costs.  It  would  have  been 
incredible  if  the  general  level  of  prices*  had  not  risen  for 
these  causes  alone.  It  does  not  seem  necessary  to  sum- 
mon in  the  volume  of  the  currency  or  of  credit  to  explain 
what  is  so  clearly  referable  to  other  forces. 

§  8.  Closely  related  to  the  maintenance  of  the  gold 
standard,  and  also  intimately  bound  up  with  the  funda- 
mental questions  of  credit  and  the  movement  of  goods 
and  securities,  was  the  problem  of  the  foreign 
exchanges.  After  the  relief  of  the  market  SSiSjes" 
from  the  heavy  burden  of  pre-moratorium  bills 
and  the  rescue  of  the  accepting  houses,  the  task  of  keep- 
ing the  rates  of  foreign  exchange  within  bounds  has  been 
at  once  the  most  difficult  and  the  most  interesting  of 
the  credit  operations  induced  by  the  war.  Here,  again, 
if  we  do  not  keep  in  mind  some  established  general  prin- 
ciples, we  are  lost  in  a  maze  of  technicalities.  It  is  said 
that  the  foreign  exchanges  broke  down.  In  reality,  what 
lay  at  the  bottom  of  the  difficulties  was  a  cessation  in  the 
movement  of  certain  goods  and  a  shift  of  trade  into  new 
directions.  It  is  from  the  sale  and  international  move- 
ment of  goods  (and  securities)  that  forms  of  credit,  like 
bills  of  exchange,  arise.  The  mechanism  comes  into 
action  automatically,  as  soon  as  trade  begins. 


122  CREDIT  OF  THE  NATIONS 

From  England's  point  of  view  there  are  two  clearly  de- 
fined periods  in  the  workings  of  the  foreign  exchanges. 
The  first  runs  from  the  outbreak  of  the  war  to  about  the 
middle  of  November,  1914,  and  is  character- 
ized by  a  high  premium  on  bills  in  favor  of 
London.  The  second  period,  running  to  the  present  time, 
is  marked  by  a  decided  fall,  followed  by  a  recover}^  and 
the  maintenance  of  a  slight  but  steady  depreciation  of 
bills  on  London. 

The  first  period  was  one  of  confusion,  in  which  expec- 
tations were  based  on  the  continuance  of  normal  trade 
balances.     The  war,  however,  broke  up  normal  relations 
as  respects  (1)  enemy  countries,  (2)  allies,  and 
In  first  period    /^\  neutrals.     In  normal  conditions  the  rate 

of  confusion        ^    '        , 

shipping-  for  bills  caunot  swing  above  or  below  par, 
disappeared,  beyoud  the  charge  for  gold  shipments,  i.  e.,  it 
is  hemmed  in  by  "shipping-points."  If  the 
price  is  forced  above  the  shipping-point  gold  is  sent 
abroad;  if  below,  it  is  imported.  But  war  removed  the 
shipping-points,  and  allowed  the  rate  to  wander  at  will. 
The  suspension  of  specie  payments,  the  prohibition  of 
exports  of  gold,  the  enforcement  of  a  moratorium  on  the 
Continent,  and  by  nearly  every  country  except  the  United 
States,  broke  down  the  normal  supports  to  the  prices 
of  foreign  bills.  Judging  from  past  traditions,  English 
economists  argued  in  the  beginning  that  England  need  not 
suspend  specie  payments,  for  the  reason  that,  as  a  creditor 
nation,  gold  was  due  her  on  call  from  all  other  financial 
centres.  If,  however,  England  in  fact  maintained  specie 
payments,  it  was  not  because  gold  was  due  her  on  de- 
mand; indeed,  gold  could  not  be  transported  for  a  time 
because  of  maritime  risks.  Later  gold  came  from  the 
United  States  and  South  Africa,  and  even  before  the  seas 
were  safe,  to  Ottawa  and  Johannesburg.     At  the  very 


ENGLISH  CREDIT  OPERATIONS  123 

outset  an  attempt  was  made  to  call  in  short-term  obliga- 
tions; and  even  in  the  few  days  before  war  was  declared 
there  was  a  stampede  on  the  Continent  and  elsewhere  to 
buy  sterling  bills,  so  that  their  prices  were  forced  up  to  a 
very  high  level  by  the  exceptional  demand.  In  European 
countries,  since  goods  had  ceased  to  move,  and  stock  ex- 
changes were  closed,  it  was  impossible  to  get  exchange  at 
any  price.  Exportation  of  gold  from  them  to  cover  bal- 
ances was  forbidden,  arbitrage  operations  on  triangular 
trade  was  no  longer  possible,  and  there  were  no  finance 
bills.  In  New  York  the  rush  to  pay  London  for  loans  on 
warrants  (£13.5  millions)  coming  due  in  September,  and 
on  a  running  trade  balance  due  England  before  the  next 
January  of  at  least  $450,000,000,  sent  the  price  of  £l  in 
London  up  above  par  of  $4.86%,  above  the  shipping-point 
of  about  $4.90,  to  as  high  even  as  $7,  there  being  a  rise 
of  30  per  cent  in  one  day.  In  fact,  gold  itself  was  not 
moving  freely,  and  foreign  bills  could  not  be  g.  j^  ^.^^ 
met.     In  that  case,  as  in  a  similar  domestic     for  exchange 

,1  1 • ,  1  ,  on  London. 

emergency,  the  proper  credit  remedy  was  to 
renew;  indeed,  it  would  have  been  highly  profitable  to 
London  bankers  to  renew  at  the  high  value  of  the  English 
pound.  It  should  have  been  realized,  however,  that 
sooner  or  later  goods  must  begin  to  move  and  create  bills; 
but  what  no  one  seemed  to  foresee  was  the  coming  and 
inevitable  purchase  of  war  supplies  from  America.  This 
new  movement  of  goods  came,  but  on  such  a  prodigious 
scale  as  to  entirely  reverse  the  creditor  position  of  England 
in  foreign  trade — a  movement  which  was  as  unexpected 
by  us  as  by  the  English. 

The  second  period  began  when  there  arose  an  unprece- 
dented demand  from  the  Allies  for  imports  of  breadstuffs, 
horses,  mules,  harness,  wagons,  trucks,  guns,  shells,  raw 
materials,  and  all  sorts  of  military  supplies.     When  Eng- 


124  CREDIT  OF  THE  NATIONS 

land  awoke  to  a  realization  of  the  portentous  war  task 
she  had  undertaken,  and  the  organization  of  factories  for 
producing  munitions  struck  its  full  stride,  she  exported 
less  than  before.  Consequently,  instead  of 
period  a  having  the  traditional  balance  of  trade  in  her 

reversal  of       favor,  England  owed  a  large  balance  to  other 

foreign  trade.  .  .    ,  it*  m    • 

countries,  mainly  to  the  United  States.  This 
situation  created  an  entirely  new  problem  of  credit, 
called  the  restoration  of  the  exchanges.  Here,  as  always, 
the  problem  of  credit  arose  from  a  change  in  the  move- 
ment of  goods.  One  of  the  striking  consequences  of  the 
war  has  been  a  phenomenal  shift  in  the  holdings  of  gold 
from  one  centre  to  another,  based  upon  a  marked  change 
in  the  direction  in  which  goods  came  to  move;  and  these 
basic  phenomena  recorded  themselves  in  the  market  for 
international  exchange.  It  is  the  function  ©f  credit  to 
reduce  the  effect  of  great  discrepancies  in  trade  balances, 
to  carry  settlements  forward  to  easier  times,  and  by  dis- 
posal of  international  securities  or  other  devices  to  post- 
pone and  minimize  the  actual  shipment  of  gold,  which 
goes  only  as  a  last  resort  when  all  other  means  of  offset- 
ting accounts  are  exhausted. 

Since  England  now  owed  others  for  unprecedented  im- 
ports (financing  these  for  her  allies  as  well  as  for  herself), 
there  was  a  great  demand  for  international  means  of 
Price  of  biUs  P^y^^ent,  namely,  bills  of  exchange,  acceptable 
on  New  York    in  those  other  countries,  particularly  in  the 

United  States.  The  price  of  bills  went  up, 
and  Europe  paid  an  increasing  premium  above  par  for  a 
claim  to  a  dollar  in  New  York;  or,  vice  versa,  in  New 
York  a  claim  on  Europe  could  be  bought  at  less  than 
par.  The  situation  got  out  of  control  before  the  big 
forces  at  work  were  finally  harnessed.  At  the  point  of 
extreme  disturbance,  September  1,   1915,  £l   could  be 


ENGLISH  CREDIT  OPERATIONS  125 

bought  in  New  York  for  $4.49,  as  against  a  par  of  $4.86%. 
It  is  of  great  interest  to  trace  the  practical  means  by 
which  this  very  exceptional  problem  of  credit  was  solved. 
The  maintenance  of  the  value  of  the  bill  of  exchange, 
the  current  credit  device  in  international  transactions,  is 
no  different  in  principle  from  the  maintenance  of  the 
value  of  the  check,  the  current  credit  device 
in  domestic  transactions.     They  must  be  paid        affecting 
on  sight  if   demand  bills,   or  at   maturity  if        price  of 
time  bills.     Postponement  of  payment  changes 
immediate  redemption  (which  is  necessary  to  keep  at  par 
any  demand  obligation)  to  ultimate  redemption  (which 
carries  with  it  a  discount,  varying  with  the  time  and  cer- 
tainty of  future  payment).     The  place  of  the  movement 
of  gold  among  the  various  factors  in  the  international 
settlement  may  be  easily  indicated.     The  levels  of  ex- 
change, in  brief,   may  be  influenced  by  the  following 
causes : 

1.  The  balance  in  the  movement  of  goods  and  securities. 

2.  The  flow  of  interest  on  foreign  investments,  payment 
for  freights,  expenses  of  travellers,  etc. 

3.  Creation  of  credits  abroad. 

4.  Gold  shipments. 

5.  The  depreciation  of  the  currency  in  the  country  on 
whom  the  bill  is  drawn,  and  in  which  the  bill  will  be  paid. 

The  need  of  imports  into  England  was  so  urgent,  and 
the  volume  so  enormous,  that  a  stable  means  of  interna- 
tional payment  was  imperative — stabilized,  that  is,  by 
the  least  possible  exportation  of  gold,  which 

.1  i?         .1  •    ■  Stabilizing 

at  home  was  necessary  tor  the  mamtenance       exchange, 
of  bank  reserves  and  the  gold  standard  in  all 
domestic  dealings.     Here  was  a  situation  requiring  skill 
and  a  steady  hand.     The  task  was  undertaken  by  the 
English  Government,  working  with  the  Bank  of  England. 


126 


CREDIT  OF  THE  NATIONS 


The  general  policj-  adopted  aimed  at  a  serious  reduction 
of  all  unnecessary  imports  of  goods  and  an  encouragement 
of  all  possible  exports  of  English  manufactures.  All  in 
all,  in  view  of  the  transfer  of  vast  productive  power  to 
making  war  supplies  at  home,  the  shortage  in  shipping 
tonnage,  the  risks  of  maritime  transportation,  the  high 
rates  of  insurance,  the  maintenance  of  British  exports  at 
a  high  level  comparable  in  values  (of  course,  at  much 
higher  prices)  with  those  of  peace  times  is  something 
quite  remarkable.^  (See  Chart  III.)  The  requisitioning 
of  merchant  shipping  by  the  government  cut  off  freight 
receipts,  and  the  cessation  of  travel  from  other  countries 
removed  a  considerable  credit  item  in  the  international 
account.  There  remain  only  the  matters  of  foreign  se- 
curities and  the  creation  of  credits  abroad,  chiefly  in  the 
United  States,  which  might  come  into  play  before  the  final 
recourse  to  shipments  of  gold. 

Ever  since  the  Civil  War  England  had  been  purchasing 
many  of  our  municipal,  State,  railway,  and  other  securi- 
ties, holding  by  1914  amounts  variously  estimated  from 
$3,000,000,000  to  $4,000,000,000.     As  soon  as  our  stock 


» ENGLISH  EXPORTS 

(000,000  omitted) 


1914 

1915 

1916 

Exports    to    allied    and    English 

possessions 

Exports  to  neutrals 

£290.7 
231.3 

£299.8 
184.0 

£388.6 
215.4 

Total 

£522.0 

£483.8 

£604.0 

The  total  exports  to  the  United  States  (plus  re-exports)  are: 

Average  of  1909-1913 £60.3 

Average  of  1914 65.0 

Average  of  1915 56.5 

Average  of  1916 64.5 

The  excess  of  total  imports  over  exports  was  in  1914,  £174.4;  1915,  £367.9; 
and  1916.  £345. 


ENGLISH  CREDIT  OPERATIONS  127 

exchanges  were  opened  in  November,  1914,  and  when  at 
about  the  same  time  our  exports  began  to  move  in  large 
volume  to  Europe — and  even  before — Eng-  Return  of 
land  began  to  meet  her  international  debts  American 
by  the  proceeds  from  the  sale  of  American 
and  other  securities.  Of  the  railway  securities  alone  held 
abroad  of  a  market  value  of  $1,751,437,912^  January  31, 
1915,  there  were  returned  to  us  by  January  31,  1917, 
$1,215,437,266  (market  value),  which  came  mainly 
through  British  hands.  In  all,  probably  about  $2,200,- 
000,000  of  American  securities  were  sent  home.  The  im- 
pulse of  individuals  to  realize  on  foreign  securities,  how- 
ever, was  not  alone  sufficient  to  overcome  the  interna- 
tional balance  against  England  and  to  stabilize  the  rate 
of  exchange. 

As  the  main  problem  was  concerned  with  American  ex- 
change, more  drastic  measures  were  undertaken  on  the 
initiative  of  the  British  Government.  On  December  13, 
1915,  the  chancellor  of  the  exchequer  stated  in 
the  House  of  Commons  that  the  government  of  American 
were  desirous  of  purchasing  outright  or  of  bor-  En'^j^  "^ 
rowing  certain  American  and  Canadian  dollar 
securities  held  by  English  investors,  in  order  to  use  them 
for  the  purpose  of  steadying  the  American  exchange.  A 
long  list  of  such  securities  was  published  by  the  Treasury, 
to  which  additions  were  made  from  time  to  time.  "Pref- 
erably, holders  of  selected  securities  were  invited  to  sell 
such  securities  to  the  Treasury  at  the  current  market 
price,  the  purchase  money  to  be  paid  in  five-year  5  per 
cent  exchequer  bonds  at  par.  Alternatively,  holders  who 
did  not  wish  to  sell  outright  were  invited  to  pledge  selected 
securities  with  the  Treasury  for  a  period  of  two  years  from 

*  Computation  of  L.  F.  Loree,  president  of  the  Delaware  and  Hudson  Com- 
pany, on  market  values  of  August  2,  1915. 


128  CREDIT  OF  THE  NATIONS 

the  date  of  transfer,  the  lender  to  receive  all  interests 
and  dividends  paid  in  respect  of  them,  and  also,  by  way 
of  consideration  for  the  loan,  a  commission  at  the  rate 
of  10s.  per  cent,  per  annum  on  the  face  value  of  the  se- 
curities. The  government  reserved  the  right  to  sell  bor- 
rowed securities  under  certain  conditions."^  Voluntary 
offerings,  however,  under  these  terms  were  not  sufficient 
to  meet  the  abnormal  situation,  although  the  amounts 
sold  or  lent  to  the  Treasury  were  very  large.-  To  insure  a 
steady  inflow  of  the  desired  securities  still  further  pres- 
sure had  to  be  supplied.  Accordingly,  "the  chancellor 
of  the  exchequer  on  27th  June,  1916,  moved  a  new  clause 
to  the  finance  bill,  authorizing  the  charge  of  an  addi- 
tional income  tax  of  2s.  in  the  pound  on  income  derived 
from  securities  which  the  Treasury  are  willing  to  pur- 
chase." This  had  the  desired  effect.  Without  doubt, 
this  plan  has  been  the  most  effective  of  all  the  means  em- 
ployed to  steady  the  rate  of  American  exchange  on  Lon- 
don. It  was  followed  up  August  12,  1916,  by  a  request 
from  the  Treasury  for  the  loan  (not  the  sale)  of  various 
Argentine,  Canadian,  Danish,  Dutch,  and  Swedish  se- 
curities, on  favorable  terms  to  holders,  in  order  to  regu- 
late other  foreign  exchange. 

The  requisitioning  of  American  securities  in  order  to 
secure  credits  to  cover  purchases  of  war  supplies  in  our 
markets,  although  important,  was  only  one  of  the  means 

employed.  Investors  in  the  United  States, 
borrow  from  noting  the  Unprecedented  increase  of  war 
States  debts  in  Europe,  were  distrustful  of  European 

securities.  In  the  face  of  this  disposition,  and 
influenced  by  the  comparative  soundness  of  English  credit, 
the  American  markets  were  nevertheless  gradually  in- 

•  Sec  A.  W.  Kirkaldy,  Labour,  Finance,  and  the  War  (191G),  p.  292. 
^  In  August,  191.5,  Mr.  Clare  is  reported  in  the  press  to  have  estimated  that 
the  sales  of  American  securities  had  aggregated  about  $500,000,000. 


ENGLISH  CREDIT  OPERATIONS  129 

duced  to  subscribe  to  English  loans.  Loans  based  solely 
on  the  credit  of  the  government  were  less  popular  than 
those  supported  by  collateral  made  up  of  the  securities 
of  neutral  countries.  Although  only  one-half  of  the 
Anglo-French  loan  of  $500,000,000  in  the  United  States 
in  October,  1915,  netting  investors  about  5}/2  per  cent,  was 
the  share  of  Great  Britain,  the  whole  was  really  based 
on  her  credit.  In  August,  1916,  a  collateral  loan  of 
$250,000,000  was  secured  through  the  British  fiscal  agents 
in  New  York,  yielding  5j^  per  cent.  A  second  British 
loan  for  $300,000,000  through  the  same  agents  was  placed 
in  October,  1916,  at  5^  per  cent  to  the  buyers  of  the 
three-year  notes,  and  5.85  per  cent  to  the  buyers  of  the 
five-year  maturities.  A  third  loan  of  $250,000,000  was 
in  the  same  way  put  out  on  February  1,  1917,  to  yield 
6  per  cent.  These  several  British  loans  in  the  United 
States  thus  totalled  to  that  date  $1,050,000,000,^  the 
proceeds  of  which  were  used  to  pay  for  supplies  bought 
in  our  markets,  and  to  that  extent  saved  the  need  of 
drawing  bills  on  London  and  lowering  their  price.  In 
addition,  British  bankers  negotiated  credits  with  Ameri- 
can banks  on  their  own  account,  thus  increasing  British 
means  of  payment  for  purchases  in  this  country. 

The  final  resort  in  settling  an  international  account 
which  has  been  seriously  disturbed  sooner  or  later  comes 
to  a  shipment  of  gold;  but  only  after  all  other  devices  have 
failed.     The  United  States  did  not  need  the 
gold  in  addition  to  its  existing  stock,  and  the     shipments 
percentage  of  reserves  to  demand  liabilities  of     mdnteMnce 
the  Bank  of  England  were  abnormally  low.     ofEngUsh 
There  would,  therefore,  be  no  reason  but  ne- 
cessity  for   a   movement   of  gold   away   from   London. 
That  necessity  existed  in  the  imperative  demand  to  pre- 
vent the  depreciation  of  the  medium  of  payment  for 

^  For  further  details,  see  infra.  Chap.  VI,  §  8,  and  Appendix  IV.,  D. 


130 


CREDIT  OF  THE  NATIONS 


English  imports.  Postponement  of  cash  payments  when 
called  for  as  a  test  destroys  immediate  redemption  and 
entails  depreciation.  In  normal  dealings  the  changes 
in  the  prices  of  exchange  due  to  the  swing  of  ex- 
ports and  imports  of  goods  (together  with  the  other 
items  in  the  account)  can  go  no  farther  than  the  ship- 
ping-point for  gold;  which  is  to  say,  the  test  of  imme- 
diate redemption  in  gold  of  the  excess  of  bills.  Should 
the  English  give  up  the  attempt  at  redemption  of  sterling 
bills  and  accept  the  policy  of  depreciation  by  suspension 
of  gold  payments  as  in  Germany  and  France?  On  the 
contrary,  they  fought  against  a  depreciation  of  the  stand- 
ard at  home  and  also  in  international  trade.  It  is  to  be 
noted,  however,  that  there  must  be  a  different  "shipping- 
point"  for  gold  in  times  of  war  from  those  of  peace,  due 
to  a  rise  in  the  charges  for  freight  and  insurance  entering 
into  the  cost  of  transporting  gold.  Therefore,  gold  ship- 
ments were  not  expected  to  bring  about  the  same  fixed  limit 
below  par  as  in  days  of  peace.  The  actual  quotations  for 
exchange  on  New  York  were  at  certain  dates  as  follows: 


July,  1914 $4.88K 

July.  1915 4.773/^-4.76  5^ 

Aug.  26.  1915 4.643^ 

Aug.  31,  1915 4.59^ 

Sept.  1,  1915 4.49 


Sept.  15-Oct.  15, 1915 .  $4 .  68-4 .  72^ 

Nov.  1,  1915 4.623^ 

Nov.  30,  1915 4.70J^ 

Dec.  13,  1915 4.77 

Jan.  6-July,  1916 4 .  66-4 .  77 


Thus,  raised  from  the  lowest  point,  September  1,  1915,  by 
the  placing  of  loans  in  the  United  States,  and  by  the  per- 
sistent shipping  of  gold  to  New  York,  sterling  bills  have 
been  later  maintained  at  about  $4.76.  It  is  not 
now  possible  to  state  exactly  how  much  gold 
has  moved  from  London  to  New  York.  We 
know  that  Great  Britain  can  control  $300,000,000  of  the 
new  production  of  gold  each  year.  The  Bank  of  Eng- 
land alone  reported  that,  in  one  period  of  nine  months 
ending  March  31,  1916,  the  total  withdrawals  of  gold  for 


Restoration 
of  exchange 


ENGLISH  CREDIT  OPERATIONS  131 

export  exceeded  $350,000,000.  Since  then  gold  receipts 
at  New  York  have  been  very  heavy  and  continuous. 
The  stabilization  of  foreign  exchange  with  the  United 
States,  by  far  the  largest  exporter  to  England  and  to  the 
Allies,  belongs  to  the  period  in  which  the  study  of  the  ac- 
counts of  the  Bank  of  England  shows  that  the  credit 
system  had  reached  a  war  adjustment  about  the  end  of 
1915.     (See  Chart  II.) 

As  gold  payments  were  not  suspended  by  the  English, 
there  is  no  reason  in  this  connection  for  discussing  the  ef- 
fect of  a  depreciation  of  the  currency  on  British  exchange.* 
The  exchanges  on  those  countries  which  had  „_  . 
suspended  specie  payments,  on  the  other  hand,  depreciation! 
were  necessarily  affected  not  only  by  the  usual  **"  "*^  "°^^* 
elements  in  the  account,  but  also  by  the  depreciation 
of  the  currency  in  which  the  bills  were  to  be  settled. 
The  separation  of  the  effect  of  the  depreciation  from 
special  causes,  however,  such  as  the  shifting  of  trade,  loss 
of  traveller's  expenditure,  and  the  like,  cannot  be  defi- 
nitely made.  The  percentage  of  discount  on  the  bills  of 
these  countries,  as  shown  in  the  neutral  market  of  New 
York,-  was: 


May  12.  1916 

November  2,  1917 

Reichsmarks 

-  15H% 

-  12M% 
-33% 

-  16^% 
-40% 

-10.9% 

-  54  % 
-73% 

Francs 

Austrian  crowns 

Lire 

Roubles 

'  It  is  quite  unnecessary  to  suppose,  as  do  some  English  economists,  that 
prices  in  the  United  States  have  been  raised  by  the  imports  of  British  gold. 
The  prices  of  war  supplies,  breadstufifs,  cotton,  and  the  like  have  risen  for  causes 
peculiar  to  the  supply  of  or  demand  for  the  articles,  together  with  the  extraordi- 
nary increase  in  wages,  coal,  and  materials,  which  are  independent  of  the  gold 
supply.  Moreover,  bank  credits  have  not  been  inflated,  Cf.  A.  W.  Kirkaldy. 
Labour,  Finance,  and  the  War,  p.  261,  and  H.  S.  Foxwell,  The  Insurance  Record 
(London),  March  30,  April  6,  April  13,  1917. 

-  Cf.  A.  W.  Kirkaldy,  Labour,  Finance,  and  the  War,  p.  258. 


132  CREDIT  OF  THE  NATIONS 

The  exchanges  with  Holland,  Denmark,  Sweden,  Nor- 
way, and  Switzerland  occupied  an  exceptional  position, 
not  only  for  special  reasons  affecting  each,  but  especially 
because  of  their  close  geographical  and  trade 
exchanges  relations  with  Germany.  Drastic  measures 
^^*  were  taken  by  the  Allies  to  prevent  gold  pass- 

ing through  these  countries  to  Germany,  even  affecting 
shipments  from  the  United  States.  Consequently,  an 
adverse  balance  of  trade  could  not  be  offset  when  less 
than  the  required  amount  of  gold  was  moving.  In  the 
New  York  market  this  situation^  was  registered  by  a 
premium  on  bills,  as  follows: 


May  12,  1916 

November  2,  1917 

+  16^% 
+    3%% 
+    1^% 

+  60% 
+  13% 
+  22% 

At  this  former  date  the  higher  charges  for  freight  and 
insurance  on  gold^  had  an  influence  on  the  price  of  these 
bills,  as  well  as  the  excess  of  exports  to  Great  Britain.  In 
January,  1916,DutchexchangeinLondonwasat  a  discount 
of  13.2  per  cent,  but  in  May  of  that  year  Holland  purchased 
£7,000,000  English  treasury  bills,  which  acted  as  an  offset 
to  English  exports,  and  the  exchanges  rose  to  a  discount 
of  only  3  per  cent,  which  covered  the  cost  of  sending  gold. 
An  anomalous  situation  arose  in  Sweden  which  led  to 
measures  (February,  1916)  protecting  it  from  being 
flooded  with  gold  in  order  to  prevent  "inflation."  Nor- 
way and  Denmark,  in  which  the  State  Bank  notes  were 
at  a  premium  over  gold,  followed  the  same  policy.^    Eng- 

'  Ibid. 

■  In  May,  1916,  the  additional  charges  for  freight  and  insurance  of  gold  were: 
France,  1 J^  per  cent;  Holland,  3;  Italy,  Ij^;  Russia,  4  to  5;  Spain,  2;  Switzer- 
land, 1.     Ibid.,  p.  257. 

»  Cf.  infra.  Chap.  VI,  §  6. 


ENGLISH  CREDIT  OPERATIONS  133 

lish  bills  on  Sweden  fell  (April  26,  1916)  to  a  discount  of 
19.1  per  cent.  More  recently  the  stringency  of  regulation 
over  the  shipment  of  gold  has  removed  the  usual  means 
of  controlling  the  price  of  Scandinavian  exchange,  which 
has  risen  to  an  extreme  quotation.  That  is,  while  imports 
from  Sweden  are  received,  but  few  exports  sent,  there 
are  no  means  of  settling  exchange,  if  also  gold  cannot  be 
shipped. 

§  9.  Finally,  we  must  reckon  with  the  credit  opera- 
tions involved  in  the  borrowings  of  the  British  Govern- 
ment on  a  scale  so  unparalleled  that  the  past  offers  no 
precedents  for  our  guidance.  These  borrow- 
ings, moreover — together  with  the  vast  quan-  borrowT^'^* 
tum  of  war  expenses  raised  by  taxation —  purchasing 
represent  the  diversion  of  goods  and  produc-  goods, 
tive  energy  from  normal,  peaceful  uses  to  the 
uses  of  war.  That  is,  the  credit  operations  here  again 
arise  from  gigantic  transactions  in  goods,  which  aim  at  pro- 
viding supplies  for  immediate  requirements  in  the  army 
and  navy  in  return  for  credit  obligations  promising  re- 
payment at  short  or  long  terms  in  the  future.  These 
public  operations  in  credit  differ  in  some  forms,  but 
not  in  principle,  from  private  dealings  in  credit.  What 
is  transferred  from  lenders  to  the  government  is  not  money 
— except  for  balances  and  pro  forma  tests — but  a  means 
of  purchasing  oower  over  goods.  Even  the  government 
is  necessarily  provided  with  this  effective  means  of  pay- 
ment for  its  war  expenditure  only  through  the  machinery 
of  the  private  industrial  and  banking  organization  of 
credit.  No  government  can  create  credit,  except  on  the 
basis  of  goods  either  present  or  in  prospect,  and  through 
a  confidence  in  the  future  certainty  and  eflSciency  of  the 
nation's  industry.     Such  must  always  be  the  basis  for  the 


1S4  CREDIT  OF  THE  NATIONS 

credit  of  a  borrowing  government.  In  principle  it  differs 
in  no  way  from  the  confidence  accorded  to  the  credit 
of  an  industrial  concern. 

For  the  first  three  years  of  the  war  (August  1,  1914,  to 
July  28,  1917)  the  total  British  debt  is  as  follows  (in  mil- 
lions) : 

Total  expenditure $25,680 

Raised  by  revenue 6,214 

Net  borrowings 19,550 

Loans  to  Dominions $730 

Loans  to  Allies* 5,125 

5,855 

Net  war  debt $13,695 

Pre-war  debt 3.535 

Total  burden  of  debt  to  date $17,230 

Annual  charge  at  5  per  cent 861 

This  burden  is  to  be  weighed  in  relation  to  an  annual 
British  income  of  about  $12,000,000,000  and  annual 
savings  of  nearly  $2,000,000,000.^ 

The  old  question  as  to  the  proportion  of  taxation  to 
loans  has  been  very  earnestly  discussed.  Out  of  dis- 
cussion, and  the  experience  of  the  belligerents  in  this 
-«_     _^.      ,    war,   it  is  clear  that  no  fixed  ratio  can  be 

Proportion  of  / 

taxation  to  arrived  at.  In  the  case  of  Great  Britain,  it 
was  necessary  to  preserve  the  vitality  of  in- 
dustries capable  of  providing  exports  to  help  offset  the 
heavy  imports.  Indeed,  the  reduction  of  unnecessary 
consumption  of  imports,  together  with  the  encouragement 
of  exports,  was  the  only  effective  means  in  the  long  run 
to  keep  the  foreign  exchanges  within  reasonable  limits 
and  protect  domestic  gold  reserves.     Thus,  too,  heavy 

'  For  the  financial  year  1917-1918  loans  to  Dominions  and  to  Allies  are  esti- 
mated at  $2,000,000,000.  See,  for  above  table,  London  Economist,  August  4, 
1917,  p.  150. 

^  The  estimates  of  the  wealth  of  a  nation  are  of  doubtful  worth.  That  of 
Great  Hrilain  is  variously  estimated  from  $.J0,000,000,000  (Mallet)  to  $65,000.- 
000,000  (Ilelirerich)  and  $80,000,000,000  (Gitfen). 


ENGLISH   CREDIT  OPERATIONS  135 

taxes  on  industries  (such  as  cotton  goods)  working  for 
foreign  consumption  would  be  hurtful  to  other  and  im- 
portant policies.  While  war  taxes  must,  as  a  minimum, 
provide  an  income  sufficient  to  carry  fully  the  interest 
charge  on  the  war  debt,  if  only  to  protect  the  credit  of  the 
state,  as  much  more  should  be  levied  by  taxes  as  the  peo- 
ple are  willing  to  pay  under  the  existing  state  of  public 
opinion,  and  as  much  as  can  be  taken  without  impairing 
the  productive  activity  of  the  various  industries.  What 
this  "revenue-point"  maybe  will  vary  with  circumstances, 
the  open  markets,  the  fortunes  of  war,  and  with  the  differ- 
ent industries.  It  can  be  arrived  at  only  by  experience, 
discrimination,  and  good  judgment.  Since  it  is  inevi- 
table in  a  war  of  untold  expenditures  that  enormous  loans 
must  be  floated,  it  goes  without  saying  that  the  whole 
margin  of  savings  and  profits  cannot  be  so  removed  by 
taxation  that  funds  are  not  left  for  subscriptions  to  loans. 
At  the  very  beginning  of  a  war  it  is  not  likely  that  the 
public  will  have  realized  the  cost  of  the  undertaking,  nor 
yet  prepared  for  excessive  sacrifices.  Hence,  in  the  first 
year  greater  dependence  upon  loans  than  on  taxes  is 
almost  always  the  experience.  Later,  taxes  can  be 
heavily  increased  with  the  hearty  support  of  the  tax- 
payers. Excessive  reliance  on  loans,  however,  must  in 
general  be  regarded  as  a  sign  of  weakness,  either  because 
increased  taxes  are  impossible  or  because  the  public  are 
unwilling  to  be  taxed. 

From  the  table  above  it  can  be  seen  that  out  of  a  total 
English   war  expenditure  of   over  $25,000,000,000  some 
$6,214,000,000  have  been  raised  by  revenue,   or  about 
one-fourth.      But  in  the  first  year  taxes  were 
only  slightly  increased.     In  1916-1917,  how-       raised 
ever,    we    have   the    remarkable  showing   of       one-fourth 

°  by  taxes. 

taxes  bringing  in  over  $2,500,000,000,  or  more 

than  the  annual  savings  per  annum  before  the  war.     Evi- 


136 


CREDIT  OF   THE   NATIONS 


dently  the  appeal  to  economy  as  well  as  the  extent  of 
the  sources  of  taxation  have  responded  to  the  need,  with- 
out impairing  the  power  to  float  loans  to  unheard-of 
totals.  Since  Great  Britain  has  not  depended  on  pro- 
tective taxes  for  revenue,  it  is  profitable  to  study  the 

actual  income  from  the  various  forms  of  tax- 
t^s'used       ation,  in  contrast  with  the  fiscal  year  ending 

March  31,  1914,  from  the  following  table^ 
prepared  by  Professor  Seligman  (in  millions): 


1913-1914 

1914-1915 

1915-1916 

1916-1917 

Customs     

£35.6 
39.6 

27.2 

9.9 

47.2 

'3.5 

£38.6 

42.4 

28.4 

7.6 

69.4 

'2.9 

£59.6 

61.2 

31.0 

6.8 

128.4 

2 

2.9 

£70.5 

56.4 

31.2 

7.9 

205.0 

139.9 

3.1 

Excise 

Estate  duties 

Stamps 

Excess  profits 

Land  house  and  land  value .  . 
All  taxes 

£163.0 
35.3 

£189.3 
37.4 

£290.1 
46.6 

£514.0 
59.4 

Non-tax  revenue  ^ 

Total 

£198.3 
197.5 

£226.7 

5.57.0 

358.0 

25.0 

27.0 

£336.7 

1,559.0 

1.360.0 

127.0 

(9.3%) 

138.0 
(10%) 

£573.4 

2,198.0 

2,000.0 

350.0 

(17%) 

375.0 

(183^%) 

Total  expenditure 

War  expenditure 

Increased  taxes 

Increased  taxes  and  non-tax 
revenue 

It  will  thus  be  seen  that  increased  war  revenues  have 
come  mainly  from  the  tax  on  incomes  and  excess  profits, 
which  together  yielded  $1,725,000,000  in  1916-1917. 

Leaving  the  question  of  taxation,  and  returning  to  the 
credit  operations  of  the  government  in  borrowing,  we 
find  employed  a  very  large  variety  of  forms  of  indebted- 
ness both  of  long  and  short  terms.     These  credit  dealings 

'  Cf.  War  Finance  Primer,  National  Bank  of  Commerce,  p.  111. 
'  Includes  post-office,  telegraph,  telephone,  crown  lands,  Suez  Canal  shares, 
etc. 


ENGLISH   CREDIT  OPERATIONS  137 

on  behalf  of  the   state   have   in   common  with   private 
credit  operations  the  element  of  futurity  and  a  basis  of 
goods;  but  the  former  differ  from  the  latter 
mainly  in  being  drawn  for  longer  terms  in  the     2°J[ft"™®°* 
future,  and,  in  the  case  of  funded  debt,  in  being     depends  on 
based  on  the  production  of  goods  in  the  more     productivity. 
or  less  remote  future.    If  this  fixed  belief  in  the 
assured  production  of  future  goods  did  not  exist,  there 
would  be  no  confidence  in  the  future  revenue  of  the  state, 
and  the  credit  of  the  government  would  cease  to  exist.  The 
willingness  to  subscribe  to  a  national  bond  presupposes 
confidence  in  the  ability  of  the  state  to  find  goods  in  the 
future  from  which  it  can  take  enough  to  pay  the  annual 
charge  and  gradually  to  reduce  the  principal. 

The  scarcity  of  commercial  bills  early  led  the  English 
banks  to  invest  idle  funds  in  short-time  treasury  bills. 
In  the  first  stages  of  the  war  there  was  thus  a  strong  temp- 
tation to  rely  on  this  form  of  short-term  debt; 
for  in  times  of  peace  short-term  government  bm""^ 

obligations  were  regarded  as  a  desirable  sec- 
ondary reserve  for  banks  easily  convertible  into  cash.  On 
the  vast  scale  on  which  they  have  been  resorted  to  in  this 
war,  however,  it  is  obvious  that  they  cannot  be  paid  off  at 
maturity  from  incoming  revenue,  but  must  be  exchanged 
for  other  forms  of  debt.     Hence,  they  ceased         ^.^ 

r>  1         1  Different 

to  have  to  the  same  degree  as  formerly  the         forms  of 
character  of  a   desirable  secondary   reserve.^  ®  *' 

They  had  the  advantage  that  they  generally  carried  a 
low  rate  of  interest,  but  they  were  constantly  falling  due, 

*  This  was  undoubtedly  one  of  the  reasons  why  the  Federal  Reserve  Board 
of  the  United  States  advised  its  member  banks  not  to  load  themselves  up  with 
large  amounts  of  English  treasury  bills  as  collateral  for  loans  to  London  in 
December,  1916.  It  did  not  imply  opposition  to  investments  in  proper  form; 
but  bank  resources  must  be  kept  liquid.  A  distinction  must  be  made  between 
commercial  and  investment  banking. 


138  CREDIT  OF  THE  NATIONS 

and  were  issued  to  a  very  large  total.  The  actual  forms 
of  debt  created  may  be  seen  in  the  following  table,  show- 
ing the  amounts  of  war  borrowing  from  August  1,  1914, 
to  August  11,  1917  (in  millions):^ 

Treasury  bUls $3,808.9 

6%  Exchequer  bonds $804.7 

5%  Exchequer  bonds: 

Due  October,      1919 $171 .3 

Due  December,  1920 1,189. 1 

Due  October,      1921 312.4 

Due  April,  1922 328. 1 

2,000.9 

3%  Exchequer  bonds,  March,  1920 109 . 1 

2.9U.7 

War  expenditure  2-year  certificates 117 . 8 

War  savings  5-year  certificates 438 . 2 

556.0 

Ways  and  means  advances  (net) 1,243 . 1 

Other  debt 1,820.9 

3,064.0 

Loans  in  United  States: 

5%  Anglo-French,  October,  1915 254.1 

5%  2-year  collateral,  September,  1916 250 . 0 

514%  3-5-year  collateral,  November,  1916 300 . 0 

5H%  1-2-year  collateral,  February,  1917 250 . 0 

1,054.1 

Loan  in  Japan,  December,  1916 50 . 0 

Funded  Loans: 

3}4%  Fu-st  War  Loan,  1925-1928 1,658.9 

4J^%  Second  War  Loan,  1925-1945 2,961 . 7 

4-5%  Third  War  Loan  (1917),  1929-1947  \  a  t^a  t 

1929-1942/ *'^"**-^ 

9,355.3 

Grand  total  of  debt,  three  years $20,803.0 

From  the  above  table,  which  gives  the  situation  before 
the  entrance  of  the  United  States  into  the  war,  it  will 
be  noted  that  only  about  one-half  of  the  total  borrow- 
ings are  in  the  form  of  permanent  debt,  while  about 
one-half    is    in    temporary,   or    short-term,   obligations, 

>  Statist,  August  18,  1917. 


ENGLISH  CREDIT  OPERATIONS  139 

which  will  allow  refunding  on  a  very  large  scale  soon 
after  the  close  of  the  war,  and  permit  a  reduction  of  the 
annual  charge. 

As  the  war  progressed,  however,  the  permanent  debt 
grew.  From  short-time  treasury  bills  to  exchequer  bonds 
running  only  a  few  years  the  step  to  long-term  funded 
debt  was  inevitable  sooner  or  later.  The 
First  War  Loan,  paying  33^  per  cent,  was  Lotm.^" 
offered  in  denominations  of  £100  to  £1,000  to 
the  amount  of  $1,750,000,000  in  December,  1914.  The 
price  was  95,  and  the  last  instalments  were  paid  in 
April  26,  1915.  In  placing  this  loan,  maturing  in  1925- 
1928,  the  accounts  of  the  Bank  of  England  show  no 
pressure  indicating  a  resort  to  borrowing  until  March  and 
April,  1915.     (See  Chart  II.) 

The  Second  War  Loan,  paying  43^  per  cent,  maturing 
in  1925-1945,  was  offered  at  100,  very  soon  after  the  First 
Loan.  To  appeal  to  small  lenders  denominations  below 
£100  could  be  had  through  the  post-offices; 
and  either  stock  inscribed  on  the  books  of  the  foan!"*  " 
Treasury  or  coupon  bonds  could  be  obtained. 
As  agreed  in  issuing  the  First  Loan,  the  S}^  per  cents 
could  be  converted  into  the  43^  per  cents,  but  only  on 
the  payment  of  a  5  per  cent  bonus;  while  the  ^}/2  per 
cent  consols  could  be  converted  at  the  rate  of  75  of  the 
old  for  50  of  the  new  securities,  and  the  23^  per  cent 
annuities  at  the  rate  of  78  to  50.  The  payments  for  the 
Second  Loan  began  July  20,  1915,  and  ended  October  26, 
1915.  It  will  be  noticed  (in  Chart  II)  that  the  resort  to 
banks  for  carrying  the  loan  was  unmistakable,  as  shown 
in  the  elevation  of  the  line  of  discounts  during  this 
period.  In  the  case  of  the  First  as  well  as  of  the  later 
loans,  it  was  announced  that  the  Bank  of  England  would 
advance  to  subscribers  to  the  loan  to  the  full  value  of 


140  CREDIT  OF  THE   NATIONS 

the  bond  for  a  period  of  three  years  at  a  rate  of  interest 
1  per  cent  less  than  bank  rate  at  the  time.     We  have 
here  the  explanation  of  the  exceptional  dis- 
credit °°         turbances   in   the  line   of  discounts  in  1915. 
(See  Chart  II.)     The  additional  load  of  pre- 
moratorium  bills,  together  with  the  loans  on  government 
securities,  sufficiently  account  for  the  continued  higher 
level  of  bank-discounts — even  after  the  immediate  flurry 
of  placing  the  loans  had  subsided- — at  over  $500,000,000,  as 
against  a  normal  level  of  half  that  sum  before  the  war. 
In  contrast  to  the  banking  effects  of  the  first  two  war 
loans  those  of  the  Third  War  Loan  early  in  1917  are  very 
striking.     This  greatest  of  all  the  borrowings  was  offered 
in  two  forms:  (1)  A  5  per  cent  bond,  maturing 
w^"       in  1929-1947,  sold  at  95,  but  subject  to  the 
income  tax,  was  set  over  against  (2)  a  4  per 
cent  bond,  maturing  in  1929-1942,  sold  at  100,  but  ex- 
empt from  the  income  tax  (although  not  from  the  super- 
tax).^    Both  descriptions  were  free  of  all  English  taxes 
if  held  by  foreigners.     Denominations  were  from  £50  to 
£5,000.     The  payments  on  subscriptions  began  at  the 
end  of  February  and  ended  May  30,  1917. 

The  one  striking  fluctuation  in  the  lines  of  deposits  and 
discounts  at  the  beginning  of  1917  was  connected  with 
this  great  $5,000,000,000  loan.  In  anticipation,  the  gov- 
ernment stopped  the  sale  of  short-term  trea- 
great  loan  sury  bills,  in  which  floating  funds  had  been 
credu^  "'^  largely  invested;  stocks  of  various  kinds,  and 
even  holdings  of  treasury  bills,  had  been  sold 
to  obtain  cash  with  which  to  pay  for  the  new  loan;  so 

'•The  4^^  per  cents  were  convertible  in  (1)  at  £105  5s.  3d.  to  £100,  and  into 
(2)  at  par.  The  same  rates  applied  to  the  conversion  of  the  5  per  cent  ex- 
chequer bonds  of  October,  1919  and  1921;  to  those  of  December,  1920,  and 
to  the  6  per  cents  of  February,  1920. 


ENGLISH  CREDIT  OPERATIONS  141 

that  we  have  the  unwonted  spectacle  of  an  accumulation 
of  private  deposits  at  the  banks — especially  at  the  Bank 
of  England  (see  Chart  II) — to  "a  bloated  total,"  ready 
to  be  turned  over  to  the  government  by  subscribers  to 
the  new  loan.  In  this  connection  the  most  striking  in- 
cident was  the  remarkable  drop  in  the  discounts  of  the 
bank  to  an  unprecedented  low  figure.  In  floating  this 
the  greatest  of  all  government  loans,  when  one  might 
have  expected  an  exceptional  demand  for  discounts  to 
aid  subscriptions  to  the  bonds,  leading  to  an  inflation  of 
credit,  we  find  just  the  reverse — an  unusual  reduction  in 
discounts  at  the  very  time  of  a  great  advance  in  private 
deposits.  The  lists  were  closed  February  16,  1917,  and, 
interestingly  enough,  it  was  only  afterward  that,  in  the 
process  of  transferring  the  large  funds  involved  in  pay- 
ing for  the  loan,  resort  was  had  to  the  banks  for  discounts, 
and  then  only  for  about  a  month.  The  discounts  dropped 
by  the  end  of  March,  although  instalments  were  yet  due 
until  May  30.  Thus,  in  the  case  of  the  largest  loan, 
there  was  no  expansion  of  credit  such  as  might  have  been 
feared. 

In  view  of  the  accumulation  of  this  vast  debt  in  three 
years  of  war,  with  the  end  not  yet  in  sight,  the  mind  at 
once  questions  the  future.  Of  the  abihty  of  the  English 
to  carry  this  colossal  war  debt  there  can  be 
little  doubt.  The  willingness  to  pay  over  carry  the 
$2,500,000,000  in  taxes  per  year  is  a  factor  of  ^^^«°  °' 
great  significance  affecting  the  credit  of  the 
country  and  the  standing  of  its  securities.  It  is  a  policy 
that  stands  out  in  bold  contrast  to  that  of  Germany, 
which  has  adopted  the  principle  of  taxing  httle  (evidently 
having  counted  on  victory  and  large  indemnities)  and 
funding  a  great  debt  in  long-term  securities.  Obviously, 
Great  Britain  has  in  mind  no  indemnities  as  a  means  of 


142  CREDIT  OF  THE  NATIONS 

lightening  her  burden  of  debt.  If  we  are  disposed  to 
measure  British  credit,  or  borrowing  power,  by  her  ability 
to  produce  goods  in  the  future,  to  hold  her  own  in  the 
competition  of  international  markets,  it  must  be  clear 
that  the  exigencies  of  war  have  unmistakably  awakened 
and  stimulated  her  productive  efficiency — wholly  apart, 
of  course,  from  the  sickening  loss  of  life  and  the  patent 
destruction  of  capital.  All  in  all,  instead  of  material 
considerations  as  to  economic  resources,  it  is  the  spirit 
in  which  she  is  likely  to  take  up  the  work  of  the  future — 
as  to  which  there  need  be  entertained  little  doubt — on 
which  most  emphasis  should  be  placed. 


CHAPTER  IV 

FRENCH  MONEY  AND  CREDIT 

Organization  of  credit — Bank  of  France  the  centre — Private  banks — 
Nexus  between  notes  and  loans — Function  of  bank  reserves — Po- 
litical situation  before  the  war — Balkan  wars — Closing  of  stock 
exchanges — Production  crippled — Moratorium — Little  use  of 
checks — Relief  to  the  paroxysm  in  credit  by  the  Bank  of  France 
— Aid  to  the  bourse — Suspension  of  specie  payments — Advances 
to  the  state — Soundness  of  the  credit  fabric — Fiscal  and  monetary 
functions  confused — Inflation  and  depreciation  of  notes — Rise  of 
prices — Foreign  exchange — Fiscal  problem  very  diflScult — Forms 
of  debt — Extent  of  war  debt — Proportion  of  taxes  to  loans — Abil- 
ity to  carry  the  burden. 

§  1.  It  is  not  without  purpose  that  we  have  first  taken 
up  a  study  of  the  workings  of  the  EngHsh  credit  system, 
which  is  most  hke  our  own  in  mechanism  and  develop- 
ment, and  next  turn  to  that  of  France,  which  Qg^^  ^^.^^  ^ 
contrasts  strongly  with  the  English,  and  which,  comparative 
moreover,  typifies  a  point  of  view  regarding 
money  and  credit  that  is  distinctly  Continental,  as  op- 
posed to  that  of  England  and  the  United  States.  Much 
is  to  be  gained  by  a  comparative  study,  especially  in  a 
time  of  great  stress.  It  is  the  inevitable  consequence  of 
such  a  gigantic  cataclysm  as  the  European  War  that  it 
should  put  to  a  critical  test  long-established  institutions. 
Probably  no  other  great  bank  has  won  a  liigher  repute 
for  good  management  and  skill  over  a  long  period  of 
years  than  the  Bank  of  France;  and  yet  it  is  quite  possi- 
ble that  this  comparative  study  of  the  credit  systems  of 
the  belligerents  during  an  exceptional  war  emergency 
may  disclose  some  errors  of  general  policy  which  shall 

143 


144  CREDIT  OF  THE   NATIONS 

oblige  us  to  revise  our  past  appraisals  of  the  relative  value 
of  important  features  in  credit  systems,  and  of  the  meth- 
ods of  the  banks  through  which  their  operations  have 
been  conducted.  In  the  case  of  France  this  question 
must  be  raised  regarding  the  time-honored  and  close  re- 
lationsliip  existing  between  the  granting  of  credit  and  the 
issue  of  the  nation's  paper  money,  between  the  fiscal  bor- 
rowing by  the  state  and  the  consequent  increase  of  its 
circulation. 

The  organization  of  credit  in  France  has  been  widely 
heralded  as  a  model.  As  is  well  known,  it  centres 
around  the  Bank  of  France,  a  great  central  bank,  supplied 
by  private  capital,  but  under  close  govern- 
F^ce^  mental  control,  and  to  which  the  institutions 

of  credit  and  the  business  pubhc  look  for  lead- 
ership. It  is  the  agent  of  the  state  in  collecting  and  dis- 
bursing funds,  and  from  it  the  government  would  expect 
to  borrow  large  sums  in  any  emergency  of  national  im- 
port. It  acts  not  primarily  for  profit,  but  to  provide  a 
low  and  steady  rate  of  interest  and  to  watch  over  the 
credit  interests  of  the  whole  country.  It  is  a  bank  of 
the  primitive  type,  holding  only  one  common  reserve  for 
both  its  deposits  and  notes  without  preference.^  It  can 
issue  notes  only  against  cash  or  statutory  loans  or  dis- 
counts, so  that  every  note  is  covered  by  an  equivalent  in 
cash  or  assets.^ 

Subordinate  to  the  Bank  of  France,  however,  are  the 
large  private  banks  which  directly  serve  the  largest  part 

'  The  bank  is  managed  by  a  governor  and  two  subgovernors,  appointed  by 
the  president  on  the  nomination  of  the  minister  of  finance,  and  aided  by  fifteen 
regents  and  three  censors,  who  are  elected  by  the  two  hundred  largest  share- 
holders, and  whose  action  is  subject  to  a  veto  by  the  governor.  These  regents 
and  censors  are  chosen  from  the  commercial  and  industrial  classes,  and  decide 
upon  the  rate  of  discount. 

-  Cf.  infra,  p.  167,  n.  2. 


FRENCH  MONEY  AND  CREDIT  145 

of  the  business  public  asking  for  loans.  The  form  of  paper 
discounted  for  merchants  is  usually  a  bill  of  exchange, 
drawn  by  the  seller  of  goods  on  the  buyer  and 
accepted  by  the  latter.  As  elsewhere  in  Eu-  bSl^"^*** 
rope,  bills  drawn  on  banks  and  institutions  of 
credit  and  accepted  by  them  provide  paper  of  a  high  grade 
for  discount  by  the  private  banks.  Paper  based  on  col- 
lateral securities  of  a  satisfactory  kind  provide  the  borrow- 
ers with  advances,  but  ordinarily  at  a  rate  perhaps  1  per 
cent  higher  than  paper  based  on  the  sale  of  goods;  because 
securities  being  less  salable  in  time  of  emergency  make 
collateral  paper  less  liquid  than  that  on  short  maturities 
constantly  provided  with  a  means  of  payment  by  the  turn- 
over of  the  goods.  Moreover,  on  a  bill  which  is  acceptable 
for  rediscount  by  the  Bank  of  France  the  maximum  rate 
charged  is  the  official  rate  of  the  Bank  of  France;  but  a 
loan  on  securities  not  being  thus  acceptable  cannot  be  used 
at  the  Bank  and  is  charged  a  higher  rate.  In  all  loans 
the  private  banks — as  well  as  the  Bank  of  France — put 
especial  emphasis  upon  the  quality  of  the  bills  and  paper 
presented.  If  these  are  of  high  quality,  cash  can  be  had  at 
any  time  by  rediscounting  their  holdings  of  paper  at  the 
central  source  of  money,  the  Bank  of  France.  Good  com- 
mercial paper  is  regarded  by  the  private  banks  as  the  best 
secondary  resource  practically  equivalent  to  cash.  The 
ability  instantly  to  obtain  cash  reserves  thus  depends  on 
the  kind  of  paper  discounted,  and  has  the  important  prac- 
tical result  of  allowing  the  large  private  banks  to  carry 
very  small  reserves,  in  fact  only  8  to  10  per  cent  as  till 
money.  Consequently,  it  happens  that  about  70  per  cent 
of  the  bills  discounted  at  the  Banli  of  France  come  from 
these  private  banks.  The  private  banks  are  not  restricted 
in  making  advances  on  any  kind  of  securities  (even  min- 
ing stocks)  which  they  think  good;  they  carry  securities 


146  CREDIT  OF  THE  NATIONS 

for  sale  to  the  public;  they  may  pay  interest  on  deposits, 
and  may  loan  on  paper  without  three  signatures — in  which 
respects  their  business  differs  from  that  of  the  Bank  of 
France. 

Since  the  exclusive  right  of  issue  gave  the  Bank  of 

France  a  special  advantage  in  a  country  where  payments 

are  chiefly  made  by  passing  money,  other  banks  did  not 

develop  fully  until  after  the  Franco-Prussian 

Nature  of        War.^     In  the  same  period  that  witnessed  the 

business  ,  m     •  p  /-^  in 

done  by  industrial  upbuilding  of  Germany,  they  flour- 

b^s!  ished  and  began  to  sell  securities  extensively, 

and  in  building  up  a  vast  discount  business 
they  also  increased  their  deposits.  It  was  through  these 
banks  that  the  surplus  capital  of  France  was  invested 
abroad.  As  elsewhere  in  Europe,  the  private  banks  were 
sometimes  directly  engaged  in  such  enterprises  as  con- 
structing the  sea  canal  of  Corinth  or  building  the  Serbian 
railroad  (which  was  carried  through  by  the  Comptoir 
d'Escompte).  It  was  between  1859  and  1865  that  the 
large  credit  institutions  of  to-day,  such  as  the  Credit 
Lyonnais,  Societe  Generale,  and  the  Credit  Industriel  et 
Commercial  were  founded.  The  Comptoir  d'Escompte 
was  founded  earlier.  It  was  the  existence  of  these  banks 
that  induced  the  public  to  open  running  accounts  and  to 
make  deposits.  They  covered  France  with  a  network  of 
competitive  branches,  and  gathered  in  capital  for  invest- 
ment. They  issued  circulars  on  business  conditions,  state 
loans  and  budgets;  reports  on  industrial  enterprises,  food- 
stuffs, and  agriculture;  and  sent  out  technical  experts  to 
report  on  undertakings. 

By  1885  the  discounts  and  deposits  of  the  four  banks 
above  mentioned  began  to  be  important.  In  twenty- 
four  years  their  sight  deposits  and  running  credits  in- 

'  The  general  joint-stock  law  was  passed  in  1867. 


FRENCH  MONEY  AND   CREDIT  147 

creased  sixfold.^  They  preferred  to  discount  short-term 
loans,  and  were  indefatigable  in  putting  the  sight  de- 
posits intrusted  to  them  into  suitable  investments.  They 
estabhshed  branches  in  foreign  countries  and  thus  assisted 
in  the  placing  of  idle  French  capital  in  foreign  securi- 
ties to  more  than  $6,000,000,000,  or  as  much  as  the 
heavy  national  debt.  It  was  this  situation  which  made 
France  a  creditor  nation,  kept  the  rate  of  foreign  exchange 
favorable,  and  aided  the  Bank  of  France  in  maintaining 
its  traditionally  large  gold  reserve. 

Apart  from  the  large  private  credit  institutions,  which 
resemble  the  English  joint-stock  banks,  there  are  some 
2,700  or  more  local  and  provincial  banks,  carrying  on  the 
work  of  discounts,  loan,  investment,  as  well  as 
serving  in  other  agencies  for  limited  constitu-  bank""** 
encies.  They  suffered  from  the  energetic  com- 
petition of  the  large  credit  companies,  until  in  1905  about 
325  of  them  formed  a  union  under  the  name  of  the  Societe 
Centrale  des  Banques  de  Province  for  self-protection,  and 
to  centralize  provincial  operations  in  Paris  in  order  to  ob- 
tain a  share  in  the  large  dealings  in  securities. 

It  is  well  known  that — unlike  England  and  the  United 
States — France  follows  the  monetary  habits  of  the  Con- 
tinent in   making  payments   by   the  passage  of    actual 
money   (usually  Bank  of  France  notes)   and 
not  by  checks  drawn  upon  deposit  accounts      ^°e^^°^ 
at  some  bank.     Few  checks  being  used,  the      indicated  in 

i*_T-  1  •••r!j-Al  the  note- 

clearing-nouse  plays  a  very  insignmcant  role.      issues. 

Therefore,  when  a  customer  of  the  Bank  of 

France  gets  a  loan,  its  immediate  effect  does  not,  as  with 

1  The  failures  of  the  Credit  Mobilier  (1867),  the  Union  Generale  (1882),  the 
Comptoir  d'Escompte  (1889),  and  the  Societe  des  Depots  et  Comptes  Courants 
(1891)  indicate  that  independent  banking  in  France  has  not  been  wholly  free 
from  speculation  and  has  met  with  the  inevitable  mishaps.  From  1876  to 
1882  the  new  issues  of  securities  which  amounted  to  9,055,500,000  francs  point 
a  moral. 


148  CREDIT  OF   THE   NATIONS 

us,  appear  in  a  deposit  account,  but  usually  in  the  item 
of  note-issues.  Indeed,  the  demand  hability  which  dis- 
closes the  extent  of  credit  operations  by  the  Bank  of 
France  is  to  be  found  mainly  in  the  amount  of  the  notes 
issued.  That  is,  if  we  wish  to  know  whether  the  credit 
of  the  general  public  has  been  expanded  or  not,  we  must 
study  the  note  liability  which  is  directly  responsive  to 
increasing  loans.  When  the  customer,  above  all,  is  the 
government  of  France — which  is  certain  to  borrow 
heavily  from  the  Bank  in  a  great  national  emergency — 
loans  to  the  state  inevitably  result  in  large  issues  of  bank- 
notes, which  eventually  find  their  way  into  bank  reserves 
or  into  the  hands  of  the  public. 

As  more  goods  and  securities  are  bought  and  sold  more 
bills  and  forms  of  credit  arise  to  be  discounted  at  the 
banks;  as  transactions  increase,  more  credit  is  'pro  tanto 
,  ^  demanded.     Since  the  need  of  the  borrower  in 

In  France 

loans  lead  to  France  for  a  means  of  payment  is  bank-notes 
no  e-issues.  (jngtead  of  the  deposit-currency,  as  with  us), 
then,  when  there  are  more  transactions  in  goods  or 
securities  and  more  loans  are  wanted,  more  notes  of  the 
Bank  of  France  are  called  for,  either  through  the  in- 
termediary of  a  private  bank  or  directly  from  the  cen- 
tral bank  itself.  The  point  of  chief  importance  unfortu- 
nately is  that  the  expansion  of  credit  carries  with  it  the 
expansion  of  the  note-issues  of  the  Bank  of  France. 
So  long  as  these  notes  expand  only  in  proportion  to  actual 
transactions  there  is  a  legitimate  growth  in  the  circula- 
tion and  no  inflation.  If,  however,  for  any  reason  a 
demand  should  arise  for  loans — such,  for  instance,  as  a 
request  in  time  of  war  for  exceptionally  large  advances 
by  the  Bank  to  the  state — there  would  result  an  issue  of 
notes,  not  based  on  the  need  of  a  means  of  payment  for 
exchanging  goods,  which  could  only  be  described  as  in- 


FRENCH  MONEY  AND   CREDIT  149 

flation — whatever  its  consequences  might  be.  Thus  the 
problems  of  money  and  credit  are  closely  interwoven  in 
France. 

The  principles  of  credit,  indeed,  receive  most  clear  and 
interesting  illustration  in  the  normal  workings  of  the 
French  system  of  credit.  It  is  held  by  some  writers  that 
credit  depends  directly  upon  the  amount  of  circulation 
money  in  circulation  or  in  bank  reserves,  dependent  on 
The  whole  operation  of  credit  in  France  seems 
to  show  that  exactly  the  reverse  is  true.  The  amount  of 
the  circulation  appears  to  be  dependent  roughly  on  the 
amount  of  discounts,  that  is,  upon  credit.  In  proportion 
as  goods  are  produced  and  exchanged  are  they  coined,  as 
needed,  into  means  of  payment — which  in  that  country 
are  mainly  Bank  of  France  notes,  apart  from  a  stratum  of 
gold  and  silver  in  the  hands  of  the  public  and  in  the  re- 
serves of  the  Bank  of  France.  The  almost  invariable 
order  of  events  in  these  normal  conditions  is  this:  the 
production  and  exchange  of  goods ;  the  bills  drawn  arising 
from  their  sale;  the  discounting  of  these  bills;  and  finally, 
as  needed,  the  issue  of  notes  (or  sometimes  the  payment 
of  coin).  This  idea  is  impersonally  expressed  by  the 
governor  of  the  Credit  Lyonnais:^ 

The  Bank  of  France  discounts  bills  in  every  part  of  the 
country,  and  it  gives  notes,  gold,  and  silver  in  the  proportions 
that  they  are  wanted  in  every  part  of  the  country.  It  is  the 
public  itself  which  indicates  the  distribution  [and,  if  I  may  in- 
terpolate, also  the  amount]  of  the  money  in  France  by  present- 
ing bills  for  discount  and  by  asking  the  Bank  of  France  for  the 
kinds  of  money  it  needs,  and  turning  in  the  kind  it  does  not 
need. 

'  National  Monetary  Commission,  No.  405,  p.  243.  This  point  of  view  is 
supported  by  the  governor  of  the  Bank  of  France,  who  said:  "It  is  the  bills 
presented  for  discount  and  the  requests  for  loans  which  regulate  automatically 
the  movements  of  issue."     Ibid.,  p.  213. 


150  CREDIT  OF  THE   NATIONS 

Under  such  a  system  as  this  the  primary  function  of 
a  metalhc  reserve  is  not  to  determine  the  quantity  of 
credit.  As  the  volume  of  trade  increases  more  loans  are 
Function  of  needed,  more  credit  is  granted,  and  then  the 
cash  authorities  of  the  bank,  thus  called  upon  to 

issue  a  gradually  increasing  demand  liability 
in  the  form  of  notes,  see  to  it  that  there  is  accumulated 
out  of  the  existing  gold  stock  of  the  world  an  amount  of 
reserves,  not  fixed  by  law  but  sufficient  to  insure  the  sta- 
bihty  and  redemption  of  their  credit  operations  in  cash 
whenever  demanded.  It  is  essentially  true  that  gold  is 
supplied  to  support  the  volume  of  credit  arising  out  of 
the  needs  of  trade — whatever  they  may  be;  not,  vice  versa, 
that  the  quantity  of  reserves  limits  the  amount  of  credit. 
The  sets  of  forces  lying  behind  the  determination  of  the 
volume  of  credit  to  be  granted,  and  those  lying  behind 
the  accumulation  of  a  gold  reserve,  are  entirely  different 
in  kind.  The  volume  of  credit  varies  with  the  productive 
forces  of  the  nation  and  with  the  volume  of  goods  produced 
and  exchanged,  while  the  quantity  of  reserves  is  limited 
only  by  the  world's  stock  of  gold  (which  has  been  increas- 
ing at  an  unprecedented  rate)  and  by  the  monetary  habits 
of  the  constituency  using  the  bank,  together  wdth  the  char- 
acter of  the  assets  carried  as  the  basis  of  loans.  It  will 
be  observed  at  once  that  entirely  different  considerations 
affect  each  of  these  items.  The  causal  relation,  if  any, 
between  them  is  not  that  usually  given.  If  the  volume  of 
legitimate  credit  increases  it  causes  the  bank  to  gather 
the  necessary  gold  reserves  (or  other  forms  of  legal  money 
allowed  to  be  held).  It  does  not  seem  to  be  correct  to  say, 
on  the  other  hand,  that  as  a  general  principle  the  volume 
of  credit  in  France  is  limited  by  reserves,  and  that  a  rise 
or  fall  of  reserves  causes  a  rise  or  fall  of  loans.  This  state- 
ment is  oblivious  to  the  direct  dependence  of  credit  upon 


FRENCH  MONEY  AND   CREDIT  151 

the  volume  of  transactions  in  goods  and  securities.  To 
be  sure,  if  at  any  moment  in  the  dynamic  swing  of  trade 
and  credit  the  reserves  do  not  accord  with  the  safe  or 
customary  percentage  of  reserves  to  demand  habihties — 
a  purely  mechanical  relation — attempts  will  be  made  to 
bring  the  two  items  into  the  proper  relation.  When  sound 
and  legitimate  loans,  due  to  an  enlargement  of  trade,  are 
offered  to  the  banks  in  increasing  sums,  reserves  which 
are  deficient  for  the  moment  do  not  limit  the  expanding 
volume  of  credit,  unless  it  be  assumed  wrongly  that  the 
world's  stock  of  gold  is  running  low.  It  is, 
therefore,  necessary  to  conclude  that  the  pri-  maintain 
mary  function  of  a  great  gold  reserve  like  that  "J«nediate 
of  the  Bank  of  France  is  to  maintain  immedi- 
ate redemption  of  its  demand  liabihties  in  coin.  When- 
ever it  fails  thus  to  function,  the  primary  purpose  of  the 
reserve  is  lost.  Immediate  (not  postponed  or  ultimate) 
redemption  not  only  maintains  the  value  of  the  notes  on 
an  equality  with  gold,  but  it  thereby  automatically  regu- 
lates the  quantity  of  notes  in  circulation  according  to  the 
actual  needs  of  the  public  as  expressed  by  their  own  judg- 
ment in  presenting  notes  for  coin.  As  M.  Pallain,  gov- 
ernor of  the  Bank  of  France,  expressed  it:^  "As  long  as 
this  redemption  is  made  without  difficulty,  there  can 
never  be  an  excess  of  notes  in  circulation."  It  will  be 
well  to  bear  in  mind  this  truth  in  our  study  of  the  work- 
ings of  French  credit  during  the  war. 

§  2.  In  the  period  just  before  the  war,  the  political 
taint  had  poisoned  both  the  military  and  financial  status 
in  France.  In  no  sense  was  she  prepared  for  such  a 
titanic  struggle  as  that  in  which  she  is  now  engaged,  and 
yet  she  was  not  without  warning.     The  complex  and  dis- 

^  National  Monetary  Commission,  (1910),  No.  405,  p.  213. 


152  CREDIT  OF  THE  NATIONS 

heartening  political  situation  was  variously  assignable  to 

the  increasing  control  of  radicals  and  socialists,  the  lack 

of  statesmen  in  Parliament,  the  rise  of  professional  poh- 

ticians,  strikes  and  social  unrest,  syndicalism, 

German  ,  *' 

threats  as  to  and  parliamentary  demagogy.  German  in- 
trigue was  obviously  at  work  stirring  up 
political  animosities,  labor  antagonisms,  anti-militarism, 
and  subverting  the  efficiency  not  only  of  the  army 
and  navy  but  of  the  financial  management  of  the  coun- 
try. Jaures  was  led  even  to  advocate  the  abolition  of 
the  army.  In  1905  compulsory  military  service  was 
reduced  to  two  years.  Meanwhile  the  rattling  of  the 
German  scabbard  began  with  the  intrusion  of  Germany 
into  Moroccan  affairs  in  1905,  the  conference  at  Algeciras 
in  January,  1906,  followed  by  a  resuscitation  of  the  diffi- 
culty in  February,  1909,  and  culminating  in  the  visit  of 
the  German  gunboat  Panther  to  Agadir,  July  1,  1911, 
which  brought  Germany  and  France  to  the  brink  of  war.^ 
In  1912  France  was  convinced  that  war  was  coming,  and 
when,  in  1913,  Germany  increased  her  army  by  several 
corps  and  levied  a  special  non-recurring  tax,  France 
reacted  by  returning  to  three  years'  military  service  (Au- 
gust 7,  1913).  It  should  be  noted,  however,  that  the 
bullying  of  France  on  the  west  should  not  be  allowed  to 

*  As  early  as  the  Combes's  administration,  concessions  in  1905  by  the  minis- 
ters of  war  and  marine  to  the  pacifists  weakened  the  efiiciency  of  the  army  and 
navy.  The  radicals  being  in  the  saddle  in  the  Rouvier  cabinet,  and  since  the 
revelation  of  weakness  in  the  Russian  army  in  tlie  defeat  by  Japan  showed 
France's  ally  to  be  despised,  Germany  evidently  believed  she  had  found  the 
opportunity  to  bully  France  and  extend  her  territory  by  the  threat  of  war. 
The  arrangement  by  France  and  England  of  affairs  in  Morocco  in  1904  was 
used  as  a  pretext  by  Germany  for  saying  that,  as  she  had  not  been  officially 
informed  of  its  provisions,  she  would  disregard  them.  Then  began  a  German 
intrigue  with  the  Sultan  of  Morocco,  and  March  31,  1905,  the  Kaiser  visited 
the  Sultan  as  "an  independent  sovereign"  at  Tangier.  Germany  called  for  an 
international  conference  on  Moroccan  affairs,  which  the  compliant  Rouvier, 
sacrificing  Delcasse,  agreed  to  at  Algeciras,  January,  1906,  and  in  which  twelve 


FRENCH  MONEY  AND   CREDIT  153 

conceal,  the  truth  that  the  events  in  the  Balkans  and  the 
intention  to  keep  Russia  from  interfering  with  the  plan 
of  Mitteleuropa  were  the  real  reasons  for  these  war  prep- 
arations of  1913.  Yet  in  spite  of  these  obvious  warnings, 
France  was  so  poisoned  within  by  German  intrigue  work- 
ing upon  corrupt  public  men,  even  at  the  head  of  the  min- 
istry of  finance,  that  she  had  become  anaemic  _ 
in  making  due  preparations  for  meeting  per-  intrigue  in 
fectly  obvious  dangers  to  her  existence.  The 
story  of  Caillaux  is  well  known.  It  seems  to  be  symp- 
tomatic not  only  of  German  methods  in  France  and  Italy, 
but  also  in  Russia,  as  disclosed  by  events  in  Petrograd 
even  before  the  retirement  of  the  Romanoffs.  We  now 
know  that  when  the  war  broke  out,  either  because  of  trea- 
son or  inexplicable  blindness,  France  had  obsolete  forts, 
no  line  of  defense  against  a  march  through  Belgium,  little 
heavy  artillery,  insufficient  ammunition,  and  virtually 
no  ambulance  system.  She  was  rich,  however,  in  a 
thrifty  peasantry,  in  a  national  spirit,  and  in  the  gallant 
and  chivalrous  patriotism  of  the  whole  rank  and  file  of 
her  army. 

The  financial  situation  was  directly  influenced  by  the 
political  complications  of  Europe.  France,  by  reason  of 
its  large  investments  in  other  countries,  or  in  their  securi- 

powers,  including  the  United  States,  participated.  Germany  was  eliminated. 
Not  content,  Germany  continued  her  intrigues  in  Morocco  until  war-clouds 
again  appeared,  followed  by  a  reference  in  February,  1909,  to  The  Hague  Tri- 
bunal, which  justified  the  French.  In  1911,  in  the  ministry  of  Caillaux,  Ger- 
many, supported  by  the  French  anti-militarist  party,  raised  the  Moroccan 
question  again  in  a  threatening  way.  She  declared  that  the  French  military 
expedition  sent  to  Fez  in  1911  had  nullified  the  settlements  of  Algeciras  and  of 
The  Hague.  Thereupon  she  sent  the  gunboat  Panther  to  Agadir,  July  1,  and 
demanded  a  part  of  Morocco.  England  supported  France,  and  finally  Ger- 
many gave  up  her  claims  on  Morocco  in  return  for  the  Cameroons,  containing 
230,000  square  kilometres  and  1,000,000  inhabitants.  Cf.  C.  H.  C.  Wright, 
A  History  of  the  Third  French  Republic  (1916),  and  for  the  pro-German  view, 
E.  D.  Morel,  Morocco  in  Diplomacy  (1912). 


154  CREDIT  OF   THE   NATIONS 

ties,  has   always   maintained   the  position  of  a  creditor 

nation,  to  whom  a  balance  of  payments  (although  not 

always  the  commercial  balance)  is  in  her  fa- 
France  a  *^  .     ' 

creditor  voF.    Funds  had  been  loaned  in  large  amounts 

country.  ^^  Brazil,  Argentina,  and  to  other  South  Amer- 

ican countries,  as  well  as  to  Mexico.  In  addition,  French 
bankers  had  granted  large  loans  to  governments  and  to 
various  enterprises  in  the  Balkans  and  southeastern 
Europe.  On  a  large  scale  France  had  also  floated  loans 
for  Russia. 

In  her  rapid  industrial  expansion  Germany  had  gone 
beyond  the  supply  of  her  own  capital  and  had  borrowed 
largely  even  from  France.  In  1911,  at  the  time  of  the 
Agadir  incident,  French  capitalists  were  entirely  war- 
ranted by  the  threats  of  war  in  calHng  in  the  large  bal- 
ances due  to  them  in  German  banks.  The  conditions 
of  credit  were  so  ill-poised  in  Germany,  due  to  over- 
expansion,  that  the  withdrawals  of  French  capital  dis- 
turbed the  equilibrium  and  nearly  brought  on  a  financial 
crisis.  Without  doubt  it  was  the  diflScult  credit  situation 
which  forced  the  German  militarists  to  weaken  and  give 
up  their  claims  on  Morocco  in  exchange  for  the  Cam- 
eroons. 

The  purpose  of  Germany  to  support  Austria-Hungary 
in  annexing  Bosnia  and  Hertzegovina  in  1908  as  against 
Russian  influence  in  the  Balkans,  was  disturbed  by  the 

outbreak  of  the  First  Balkan  War  in  the  fall 
The^Baikan      ^f  j^j^.     The  League  of  the  Balkan  States, 

created  by  Venezelos  against  Turkey,  and  the 
victorious  progress  of  their  troops  toward  Constantinople 
made  the  German  scheme  of  expansion  to  the  Persian 
Gulf  very  precarious;  hence  the  general  dread  of  a  Eu- 
ropean War  which  stopped  the  headway  of  the  League  at 
the  London  Conference  of  1913  and  blocked  Serbia's  way 


FRENCH  MONEY  AND  CREDIT  155 

to  the  Adriatic.  When  the  Second  Balkan  War,  begin- 
ning in  the  summer  of  1913,  brought  the  submission  of 
Bulgaria  to  Greece  and  Serbia,  supported  by  Rumania, 
the  outcome  was  not  at  all  to  the  liking  of  Germany  and 
Austria-Hungary.  In  every  financial  centre  there  was  a 
long-continued  fear  that  a  European  war  was  inevitable. 
France  itself  was  particularly  hard  hit  by  the  two  Balkan 
wars,  because  she  had  been  financing  the  Balkan  States, 
and  at  the  end  they  were  so  exhausted  that  they  were  in 
no  condition  to  repay  their  French  creditors.  Above  all, 
the  uncertainty  and  tension  produced  by  the  warlike  at- 
titude of  Germany  caused  an  anxiety  which  affected  all 
financial  markets,  even  in  the  United  States.  Thus 
France  was  already  crippled  in  her  credit  before  the  Eu- 
ropean War  began. 

Moreover,  corrupt  politics  and  an  on-creeping  radical- 
ism had  been  eating  out  the  vitals  of  her  financial  safety 
at  home.  Quite  irrespective  of  her  ability  to  pay,  the 
country  was  being  bled  by  those  who  were 
steadily  using  the  state — obeying  an  extreme  and 
socialistic  theory — as  a  means  of  equalizing  the  deb^*^'°^ 
distribution  of  wealth,  and  who  were  thereby 
as  steadily  increasing  the  burdens  of  taxation  in  order  to 
extend  what  may  be  called  *' social"  expenditures  in 
behalf  of  the  proletariat.  The  cost  of  such  parental  gov- 
ernment had  been  growing  so  rapidly  that  the  national 
income  had  lagged  far  behind  the  swelling  expenditures, 
and  the  debt  of  the  state  had  become  the  largest  of  any 
in  the  world.  Her  debt  of  $6,347,540,000  before  the  war 
began  was  five  times  that  of  the  German  Empire,  and 
nearly  twice  that  of  Great  Britain,  while  the  burden  of 
taxation  was  ominously  heavy.  Nor  could  it  be  said  that 
the  huge  debt  was  directly  due  to  the  abnormal  war 
indemnity   of   $1,000,000,000   imposed   by   Germany   in 


156  CREDIT  OF  THE  NATIONS 

1870-1871;  for  it  had  risen  to  six  times  the  amount  of  that 
indemnity.  In  the  year  before  the  war  it  seemed  as  if 
the  searching  for  new  sources  of  taxation  could  go  httle 
farther,  and  she  had  been  obhged  to  increase  her  debt 
in  order  to  cover  the  demands  of  her  budget.  No  one 
of  the  belHgerents  was  economically  so  unprepared  as 
France,  no  one  was  so  handicapped  for  entering  upon  a 
long  and  expensive  war.  It  came  upon  the  country 
after  it  had  been  suffering  from  two  years  of  economic 
depression. 

§  3.  Having  in  mind  the  characteristics  of  the  organ- 
ization of  credit,  and  the  situation  in  France  immedi- 
ately preceding  the  war,  we  are  obviously  interested  to 
know  how  she  weathered  the  storm. 

The  most  sensitive  market,  and  the  one  first  to  dis- 
count coming  danger  in  its  prices,  is  the  stock  exchange,^ 
especially  in  a  country  like  France,  which  dealt  largely 
in  foreign  securities.  Inasmuch  as  securities 
Sch2ge°'^  formed  the  coUateral  for  advances  by  the 
banks  on  an  enormous  scale,  the  organization 
of  French  credit  would  be  touched  to  the  quick  by  the 
weakness  of  securities.  Every  one  will  understand  how 
important  it  is  for  owners  of  securities  to  be  able  in  an 
emergency  when  goods  are  unsalable  to  convert  their 
holdings  into  cash.  Even  before  the  beginning  of  war 
the  French  markets  for  securities  had  become  panicky. 
In  Berlin  what  was  coming  was  known  as  early  as  May, 
1914.     The  critical  condition  of  the  markets  in  Berlin 

'  The  official  market,  or  bourse,  is  known  as  the  Parquet,  composed  of 
Agents  de  Change,  or  stock-brokers,  appointed  by  the  government  and  under 
the  control  of  the  Ministry  of  Finance.  The  seventy  brokers  in  Paris  form  an 
asso<'iation  and  by  ballot  choose  a  syndical  chamber,  known  as  the  Syndicat 
des  Agents  de  Change.  Securities  not  admitted  on  the  official  quotation  list 
are  dealt  in  outside  the  bourse  in  the  coulisse  (curb). 


FRENCH  MONEY  AND  CREDIT  157 

and  Vienna  brought  on  a  veritable  panic  in  Paris  by 
July  23.^  On  July  25  there  was  a  rush  to  sell  securities, 
and  on  July  30  the  coulisse  was  closed;  although  the 
parquet  remained  open,  it  was  under  strict  supervision  by 
the  government.  On  that  day  not  only  the  parquet 
but  also  the  stock  exchanges  of  London  and  New  York 
were  open;  but  before  business  on  Fridaj^  July  31,  those  of 
London  and  New  York  were  closed.  Although  the  parquet 
remained  nominally  open,  it  did  very  little  business;  and 
only  when  the  government  withdrew  from  Paris  to  Bor- 
deaux was  the  bourse  closed  by  the  prefect  of  police  on 
September  3,  1914.^  It  was  again  opened,  only  for  cash 
transactions,  December  7,  1914.  The  settlements  for 
stock  transactions  due  in  July  had  to  be  postponed  to 
the  end  of  August  and  again  to  October.  Securities  were 
now  unsalable  even  at  panic  prices.  All  credit  obliga- 
tions based  on  the  movement  or  sale  of  securities  were 
"  frozen."  Banks  which  had  made  advances  on  even  the 
best  securities  could  not  make  payment  on  demand  de- 
posits if  their  assets  were  not  convertible  into  cash. 
Consequently,  it  was  obviously  impossible  for  the  public 
to  obtain  by  sales  of  securities  the  means  of  payment 
with  which  to  meet  maturing  obligations.  In  fact,  a 
vast  amount  of  capital  was  locked  up  and  made  unavail- 
'able  for  normal  purposes. 

The  severity  of  the  crisis  in  securities  can  be  appre- 
ciated by  the  statement  that  the  total  sum  involved  in 
loans  for  carrying  them  was  estimated  at  $120,000,000 
for  the  parquet;  $40,000,000  for  the  coulisse; 
while  contangos  (charges  for  carrying  forward  securities 
securities  whose  buyers  could  not  pay  for 
them   on   settlement)    outside   the   bourse   showed    that 

^  C/.  the  chronology  given  on  p.  79,  supra. 

^  L'Sconomiste  Frangais,  September  12,  1914,  p.  329. 


158  CREDIT  OF  THE  NATIONS 

banks  and  credit  houses  were  involved  for  about  $160,- 
000,000.  The  fall  in  prices  had  gone  to  30  or  40  per  cent. 
The  decline  in  rentes,  the  favorite  national  bond,  was 
unprecedented,  those  bearing  3  per  cent  dropping  to  75 
by  the  middle  of  August,  1914. 

Credit  obHgations  based  on  the  production  and  ex- 
change of  goods  were  equally  shaken  by  the  sudden 
crisis.  Credit  had  been  given  involving  an  obligation 
_  on  the  part  of  the  borrower  to  return  a  money 

Domestic  .        -^  i     •        i       p 

production  equivalent  of  goods  in  the  future,  so  that  the 
cnppie  .  ability  to  make  that  return  depended  on  the 

continuance  of  the  production  and  sale  of  goods.  But 
on  the  day  of  mobilization,  August  1,  virtually  every 
able-bodied  man  in  France  to  the  age  of  forty-seven  was 
called  to  the  colors.  It  took  almost  every  man  of  that 
age  from  agriculture,  and  of  course  at  once  reduced  the 
normal  production  of  all  industries.^  For  instance,  of  the 
135  blast-furnaces  in  operation  in  1913,  only  116  were 
alight  July  1,  1914,  and  of  these  about  50  were  shut  down. 
The  silk  industry,  too,  was  at  a  standstill.  The  stoppage 
of  operations  affected  all  manufactures  except  those  en- 
gaged in  supplying  war  materials.  Military  needs  absorbed 
practically  all  means  of  transportation  by  the  railways. 

The  early  invasion  of  Belgium  and  northeastern  France 
by  the  Germans  touched  some  of  France's  vital  economic 
interests.  Here  was  the  heart  of  the  textile  industries. 
In  Lille,-  Cambrai,  and  Sedan  were  the  chief  woollen- 

'  Of  the  18,000,000  persons  engaged  in  industry,  probably  3,000,000  were  at 
the  front;  but  the  upheaval  in  production  made  it  impossible  to  keep  the 
remaining  15,000,000  employed  as  before.  Amid  the  general  economizing,  of 
course,  the  trade  in  luxuries  immediately  fell  off.  By  October,  1914,  it  was 
estimated  that  2,000,000  workmen  and  1,000,000  refugees  were  out  of  work, 
so  that  October  26  L'Office  Central  was  opened  in  the  Ministry  of  Labor  to  find 
employment  for  them.  The  numbers  of  women  to  be  cared  for  created  the 
largest  and  most  difficult  problem,  requiring  a  heavy  outlay  by  the  state. 

^  The  local  bank  of  Verley,  Decroix  &  Co.  in  Lille  had  widened  out  into 
twenty-seven  branch  offices  in  the  Departments  of  Nord  and  Pas  de  Calais. 


I 


FRENCH  MONEY  AND  CREDIT  159 

mills.  Moreover,  important  metallurgic  industries  and 
her  richest  coal-fields,  which  had  yielded  26,000,000  out 
of  the  country's  total  of  38,000,000  (metric)  tons,  or  two- 
thirds  of  her  total  production  of  coal,  were  lost  to  France. 
Of  course,  the  coal  supply  of  Belgium  was  cut  off.  These 
facts  explain  why  the  labor  question  in  the  Welsh  coal- 
mines was  so  vital  to  the  coal  production  now  needed  to 
help  out  England's  allies,  France  and  Italy. ^  Again,  the 
beet-sugar  district  of  Belgium  and  France,  including  the 
Department  of  the  Somme  and  reacliing  nearly  to  Paris, 
was  occupied  by  the  Germans.  Such  a  blow  to  the  pro- 
duction of  goods,  the  very  basis  of  credit,  came  upon 
France  already  weakened  by  two  years  of  economic  de- 
pression. 

The  torpidity  of  credit,  caused  by  the  inanimate  condi- 
tion of  industry  and  commerce,  was  still  further  aggra- 
vated by  the  injection  of  the  moratorium.  It  gave  debt- 
ors an  excuse  for  not  paying  creditors,  and  by  locking  up 
funds  even  made  most  payments  impossible.  On  Au- 
gust 6,  1914  (revised  August  9),  a  decree  of  the  gov- 
ernment was  issued  affecting  bank  deposits,  by  which 
depositors  could  withdraw  250  francs  and,  in  addition, 
only  5  per  cent  of  any  surplus  above  that 
sum.^  If  the  depositor  could  prove  he  needed 
the  funds  for  paying  wages  or  for  raw  materials,  he  could 

•  A  new  light,  moreover,  is  thrown  on  the  calculated  violation  of  the  neutrality 
of  Belgium — apart  from  finding  the  easiest  road  to  Paris — by  the  fact  that  the 
seizure  of  the  coal-fields  and  gas-works  of  the  French  and  Belgian  districts 
enabled  Germany,  it  is  estimated,  to  increase  her  output  of  benzol  from  120,- 
000,000  to  200,000,000  gallons— one  essential  explanation  of  her  ability  to 
keep  up  the  unprecedented  supply  of  explosives  for  her  heavy  guns. 

^  The  original  decree  was  modified  later,  as  follows : 

August        29,  allowing  withdrawal  of     250  francs,  plus  20%  of  excess. 

September  27,  allowing  withdrawal  of     250  francs,  plus  25%  of  excess. 

November,         allowing  withdrawal  of  1,000  francs,  plus  40%  of  excess. 

December,         allowing  withdrawal  of  1,000  francs,  plus  50%  of  excess. 

Depositors  in  savings-banks  were  allowed  to  draw  only  50  francs  a  fortnight. 
Cf.  Appendix  II,  B. 


160  CREDIT  OF  THE   NATIONS 

withdraw  the  whole.  The  moratorium  was  extended  to 
insurance  contracts;  payments  on  the  new  loan  were 
relaxed,  and  bills  drawn  before  July  31  were  extended. 
On  August  10  it  was  applied  in  general  to  all  "civil,  com- 
mercial, and  administrative  prescriptions  and  pre-emp- 
tions." By  the  end  of  October  some  pressure  was  put 
upon  debtors  (except  those  called  to  the  colors  and  those 
in  the  invaded  area)  to  clear  up  their  indebtedness,  and 
after  December  1  the  debtor  could  be  called  upon  to 
show  if  he  were  evading  payment.  Renters  were  also 
given  extensions,  at  the  risk,  of  course,  of  reducing  the 
ability  of  owners  to  meet  the  interest  on  real-estate  obli- 
gations. By  January,  1915,  a  number  of  important  banks 
removed  all  restrictions  upon  the  withdrawals  by  deposi- 
tors, a  measure  tending  to  bring  funds  out  of  hoards. 

At  this  distance  the  policy  of  a  moratorium  seems  to 
have  been  unfortunate.  Credit  is  kept  sound,  and  its 
vahdity  constantly  tested,  by  the  imperative  necessity  of 

payment  at  maturity.  A  moratorium  is  the 
mOTatorium.     negation   of   credit.     If   it   be  said   that   the 

paralysis  of  trade  and  the  unsalability  of  se- 
curities made  payments  of  obligations  at  maturity  im- 
possible, and  that  the  moratorium  was  necessary  to  save 
men  from  failure,  the  obvious  reply  is  that  the  temporary 
crisis  which  stopped  production  and  trade  was  the  very 
thing  which  then,  if  ever,  required  free  discounting  by 
the  banks.  It  is  the  necessary  function  of  bank-credit 
to  rise  to  just  such  an  emergency.  If  there  had  been  no 
moratorium  there  would  have  been  a  greater  demand  for 
loans  than  was  actually  shown — and  that  was  certainly 
very  serious.  But  even  an  exceptionally  heavy  creation 
of  temporary  loans  for  such  an  emergency  would  have 
furnished  a  means  of  payment  for  maturing  obligations, 
it  would  have  unlocked  capital,  it  would  have  worked 


FRENCH  MONEY  AND   CREDIT  161 

against  hoarding,  it  would  have  been  the  one  thing  to 
hasten  the  inevitable  recovery  of  trade  and  thereby  have 
enabled  the  public  soon  to  reduce  its  credit  commitments. 
That  is,  the  extension  and  free  granting  of  credits  reacts 
upon  the  critical  situation  and  acts  to  reduce  the  very 
need  of  credit.  The  time-honored  maxim  that  in  a 
crisis  the  banks  should  lend  freely  has  been  proved  by 
many  an  experience  in  many  countries.  A  credit  sys- 
tem is  not  functioning  normally  where  a  moratorium  is 
felt  to  be  necessary.  It  assumes  that  the  borrower  is  not 
worthy  of  a  legitimate  loan  and  drives  him,  under  a  mora- 
torium, to  what  is  a  refusal  to  pay,  which  is  actual,  if  not 
legal,  bankruptcy. 

What  is  the  end  to  be  gained  in  an  unexpected  crisis? 
To  enable  debtors  by  credit  to  meet  immediate  obliga- 
tions, and  then  to  be  given  time  to  liquidate  goods  and 
securities   without  throwing  masses  of  them 

"         ,  Function  of 

on  the  market  at  a  great  sacrifice.  The  re-  credit  in  a 
newal  of  a  loan,  if  the  borrower  still  cannot 
pay  at  maturity  is,  to  be  sure,  a  disguised  moratorium, 
but  it  is  all  the  moratorium  really  needed,  and  it  is  con- 
fined to  private  adjustments.  In  our  own  country  the 
banks,  in  the  crushing  panic  of  1914,  quite  generally  re- 
fused to  push  a  hard-pressed  borrower  for  nearly  six 
months  after  the  outbreak  of  the  war,  during  the  time 
when  many  goods  and  securities  were  unsalable.  It  never 
occurred  to  us  to  resort  to  a  public  moratorium. 

There  seems  to  be  little  doubt  that  in  France  at  this 
time  there  was  a  large  supply  of  free  capital,  but  that 
the  conditions  then  existing  kept  it  unemployed.  This 
was  due  somewhat  to  timidity,  but  largely  to  the  mora- 
torium. It  resulted  that  large  amounts  of  capital  were 
withdrawn  from  industry  at  a  critical  moment.  The  re- 
strictions on  the  withdrawal  of  bank  deposits,  moreover. 


162  CREDIT  OF  THE  NATIONS 

caused  no  little  lack  of  confidence  in  bank  deposits  and 
their  security.  The  inability  to  draw  deposits  freely  put 
a  premium  on  hoarding.  In  addition,  the  locking  up  of 
bank-balances  forced  the  customer  to  seek  funds,  if  pos- 
sible, in  other  ways,  and  added  to  the  pressure  on  the 
banks  for  discounts. 

In  general,  however,  the  whole  matter  brings  up  again 
the  worth  of  the  Continental  habit  of  making  payments 
mainly  by  money  and  not  by  more  economical  methods 
such  as  the  use  of  checks.     At  the  bottom  of 
checks^^'^^"^    the  tendency  to  withdraw  deposits  was  the 
desire  to  get  notes  or  coin   which  could  be 
hoarded.     If  other  means  of  payment,  such  as  checks,  had 
been  familiar  to  customers,  they  could  have  safely  retained 
their  funds  in  the  banks  and  yet  had  them  available  at 
any  moment  without  impairing  the  supporting  reserves  of 
the  banks  by  calling  for  cash.     Indeed,  it  is  worth  noting 
that  out  of  the  stress  of  this  great  war  emergency  serious 
attempts  were  made  to  introduce  the  check  system  into 
France.     But  the  restriction  on  the  withdrawal  of  bank 
deposits  had  unfortunately  frightened  the  small  deposi- 
tor from  using  banks  and  caused  a  distrust  of  the  check. 
As  early  as  1859  the  Credit  Industriel  et  Commercial 
was  founded  to  introduce  deposit  accounts  accompanied 
by  the  use  of  checks,^  after  the  manner  of  English  insti- 
tutions.    Later  other  companies  were  founded 

Attempts  to        ,      ,      ,        ,  ^     , 

introduce         in  imitation;-  but  the  confusion  of  investment 

with  commercial  banking  and  the  allurements 

of  speculation  did  not  provide  a  good  soil  for  the  growth 

of  the  deposit-currency,  which  requires  a  confidence  by 


'  The  check  was  legalized  and  defined  by  the  Act  of  June  14-20,  1865. 

*  The  Societe  Generale  pour  Favoriser  le  Developpement  du  Commerce  et  de 
rindustrie  en  France  was  followed  by  the  Credit  Lyonnais  (18G3)  and  two  others 
in  Lyons,  and  one  in  Marseilles  (18G5). 


FRENCH  MONEY  AND  CREDIT  163 

the  public  in  the  safety  and  Hquidity  of  bank  deposits 
largely  based  on  seasoned  experience.  It  must  find  its 
successful  operation  chiefly  in  well-established  monetary 
habits,  and  not  in  the  published  willingness  of  special 
banks  to  prosper  by  introducing  a  means  of  attracting 
business,  no  matter  how  successful  it  may  have  been  in 
other  countries  having  different  monetary  habits.^ 

The  campaign  recently  started  by  the  Bank  of  France 
to  induce  a  more  general  use  of  checks  rightly  aims  at 
educating  the  general  pubhc  on  the  risk  of  loss  in  carrying 
bank-notes  in  the  pocket;  on  the  waste  of  capital  in  sup- 
porting a  large  circulation,  which  might  be  economized 
by  using  checks  and  by  enabling  debts  and  credit  to  the 
amount  of  hundreds  of  bilhons  of  francs  to  be  offset 
against  each  other  without  the  use  of  any  but  small  bal- 
ances in  money;  and  on  the  methods  by  which  checks 
should  be  paid  only  to  the  rightful  owner.  The  fact  that 
checks  "crossed"  by  two  parallel  lines  {harres  transver- 
sales)  (which  makes  them  negotiable  only  at  a  bank)  can 
now  be  used  in  France  to  avoid  risk  in  the  mails,  seems 
to  show  that  the  public  do  not  enjoy  our  facility  of  get- 
ting checks  cashed  on  identification,  to  the  protection  of 
both  the  drawer  and  the  bank.  The  slight  use  of  checks 
in  France  makes  the  old  clearing-house  (Chambre  de  Com- 
pensation, established  in  1872)  of  little  importance.  Part 
of  the  work  of  a  clearing-house  is  met  by  operations  such 
as  transfers  through  the  Bank  of  France.  On  July  22, 
1917,  spurred  on  by  the  hoarding  of  both  cash  and  bank- 
notes, and  the  fact  that  the  old  clearing-house  had  only 

*  Liesse  assumes  that  the  success  of  a  check  system  depends  on  having  a 
group  of  banks  of  deposit  {National  Monetary  Commission,  No.  522,  p.  195); 
but  France  has  these  in  a  way.  What  France  does  not  have  is  a  willingness  to 
make  payments  in  some  other  way  than  by  money.  That  implies  a  different  at- 
titude toward  banks  and  less  hoarding  than  now  exists  among  the  thrifty  French 
people. 


164  CREDIT  OF  THE  NATIONS 

a  restricted  membership,  a  new  Chambre  de  Compensation 
was  established,  with  a  membership  of  nearly  all  the  im- 
portant banks,  and  absorbing  the  recently  formed  Caisse 
de  Compensation,  created  to  meet  the  needs  of  British  and 
American  banks. ^ 

The  early  effects  of  the  crisis  showed  themselves  not 
only  on  the  bourse  and  in  the  moratorium  but  also  in 
the  circulation.  The  metallic  money  disappeared  in  a 
trice;  hoarding,  which  goes  with  the  national 
mone^^°*  characteristic  thrift,  was  exaggerated  by  the 
outbreak  of  war.  Even  the  small  silver  coins 
vanished.  Of  the  coin  paid  out  by  the  banks  little  re- 
turned to  circulation.-  The  Bank  of  France  gave  out  by 
the  end  of  1914  some  300,000,000  francs  of  gold,  which 
went  the  way  of  all  the  coin.  The  advances  made  on 
securities,  as  well  as  the  payments  which  began  to  be 
made  by  the  government  to  contractors,  seemed  to  have 
no  effect  on  the  circulation.  The  Bank  of  France  early 
(August  5,  1914)  suspended  specie  payments  on  its  notes 
(as  it  did  August  12,  1870)  which  were  made  legal  tender 
{cours  forcS),  and  issued  in  denominations  of  twenty  and 
five  francs.  These  notes  seem  to  have  been  readily 
accepted. 

The  exceptional  and  unparalleled  crisis  in  credit,  taken 
in  connection  with  existing  monetary  habits  and  the  or- 
ganization of  credit  in  France,  placed  the  whole  respon- 

*  At  this  time,  also,  the  status  of  the  check  has  been  strengthened  by  a  law 
punishing  any  one  who  issues  a  check  without  funds  to  meet  it,  or  who  with- 
draws funds  after  issuing  a  check,  with  imprisonment  for  from  two  months  to  two 
years,  and  a  6ne  of  net  less  than  one-quarter  of  the  amount. 

In  a  recent  case,  however,  the  buyer  of  goods,  wlio,  after  paying  for  them 
by  a  check,  found  the  goods  not  as  agreed  upon  and  stopped  payment  on  the 
check,  was  upheld  by  the  French  court. 

^  In  Avignon,  a  city  of  40,000  inhabitants,  a  branch  of  a  secondary  bank 
paid  out,  from  July  25  to  August  1,  about  3,000,000  francs  of  gold  and  1,000.000 
francs  silver  with  little  or  no  result  on  the  circulation. 


FRENCH  MONEY  AND  CREDIT  165 

sibility  for  guidance  and  recovery  on  the  management  of 
the  Bank  of  France.  Both  for  the  business  public  and 
the  state  it  was  the  final  source  of  relief. 

§  4.  In  this  examination  of  the  credit  operations  of 
the  major  nations  during  the  most  stupendous  war  of  all 
history,  we  have,  as  already  said,  a  rare  chance  for  com- 
parative study,  and  the  opportunity  to  profit 
by  the  revelation  of  defects  and  advantages  paroxysm  of 
which  experience  may  develop.  The  study  pj^'ce" 
will  have  failed  of  its  purpose,  however,  if  it 
does  not  early  disclose  that,  while  the  forms  and  legal 
mechanism  of  credit  by  virtue  of  historical  and  racial 
characteristics  differ  in  the  different  countries,  the  funda- 
mental principles  of  credit  are  nevertheless  the  same, 
irrespective  of  the  external  forms  in  which  they  work. 
Indeed,  the  inevitable  methods  of  relief  for  paroxysms  of 
credit  are  almost  monotonously  the  same  everywhere. 
In  France  they  have  to  do  with  efforts  to  restore  the  sal- 
ability  of  securities,  the  amelioration  of  the  moratorium, 
the  restoration  of  liquidity  to  banking  assets,  and — as  the 
chief  means  of  this  end — finally,  a  reliance  on  the  Bank 
of  France  for  discounts  in  order  that  engagements  may 
be  met  by  a  means  of  payment  acceptable  to  the  mone- 
tary habits  of  the  people.  These  habits  are  such  that 
this  means  of  payment  must  come,  not  as  in  England  from 
loans  at  the  banking  department  of  the  Bank  of  England 
which  led  to  the  use  of  checks  drawn  on  deposit  accounts, 
but  loans  from  banks,  or  from  the  Bank  of  France  it- 
self, which  resulted  in  the  issue  of  Bank  of  France 
notes.  Although  the  practical  means  are  different,  the 
end  is  the  same.  To  discount  freely  comes  to  be  the 
final  eflBcient  remedy.  For  the  banks  themselves  it  is 
self-preservation,    bringing   with   it,    as   it   always   does 


166  CREDIT  OF   THE   NATIONS 

in  a  crisis,    more   or   less   loosening   of   the   rigidity   in 
making  payments. 

We  are  now  led  to  consider  the  operations  of  the  great 
central  institution  of  credit,  the  Bank  of  France,  in  what 
was  without  doubt  the  greatest  emergency  in  its  whole 

history.  Would  it  be  able  to  liquefy  the 
responsibility  frozen  asscts,  start  the  circulatory  exchange 
on  the  Bank     q£  goods,  allow  produccrs  to  obtain  capital, 

enable  a  dislocated  industry  under  new  ad- 
justments again  to  turn  out  goods  which  would  form  a 
basis  for  normal  credit  operations,  help  to  bring  about 
the  salability  of  securities,  and,  in  addition,  to  meet  the 
prodigious  demands  certain  to  be  made  upon  it  for  ad- 
vances to  the  state  at  a  time  when  loans  and  taxes  could 
not  be  immediately  relied  upon.^^  Could  this  be  done 
without  undue  strain  on  its  note-issuing  power,  which 
would  be  inevitably  expanded  as  the  demands  for  credit 
increased.'*  The  responsibility  laid  upon  it  was  a  heavy 
one. 

That  exceptional  demands  for  discounts  would  be  made 
on  the  Bank  even  before  the  actual  outbreak  of  hostilities 
goes  without  saying.     In  the  six  days  from  July  27  to 

August  1,  1914,  the  commercial  paper  dis- 
SaST"* '°'      counted  increased  from  $316,000,000  to  $608,- 

000,000.  In  the  first  days  of  August  the 
tenseness  of  the  situation,  in  a  country  where  the  rate 
of  interest  at  its  central  bank  had  been  kept  at  about 
3  per  cent  for  long  periods,  may  be  shown  by  the  fact 
that  the  Bank,  in  order  to  protect  itself,  had  to  raise  its 
discount  rate  to  6  per  cent  (and  that  for  advances  on 
pubhc  securities  to  7  per  cent).  By  August  20,  1914, 
the  rates  fell  to  5  and  6  per  cent  respectively.  A  special 
bureau  for  new  discounts  was  opened  in  Paris.  Yet,  in 
spite  of  this  aid,  resort  was  had  by  other  institutions  to 


o 


^ 


1 


FRENCH  MONEY  AND   CREDIT 


167 


the  moratorium  and  the  restriction  on  the  withdrawal  of 
deposits.  We  are  somewhat  in  the  dark  as  to  what  hap- 
pened immediately  after  the  outbreak  of  the  war,  since 
the  Bank  of  France  did  not  pubhsh  its  accounts  until 
February  4,  1915.^  Nothing  was,  in  fact,  gained  by  this 
reticency,  because  the  credit  events  in  the  omitted  months 
were  inevitably  disclosed  by  the  later  developments. 
The  whole  story  of  the  credit  operations  of  the  bank,  and 
thus  those  which  are  pivotal  for  the  organization  of  credit 
in  France,  are  presented  in  Chart  IV,  drawn  on  the  same 
scale,  and  hence  comparable  with  those  of  the  Bank  of 
England  at  a  glance. 

The  direct  service  of  the  Bank  of  France  in  relieving 
the  needs  of  the  public  appears,  of  course,  in  the  expan- 
sion of  the  discounts  and  advances.^     In  the  period  be- 

'  From  statements  by  M.  Ribot,  minister  of  finance,  we  obtain  the  following 
figures  for  the  period  of  unpublished  accounts  in  1914  (millions  of  francs): 


October  1 

December  10 

December  24 

Specie  reserves 

4,411 

4,476 
2,100 
9,299 
2,177 

4,492 
3,849 
3,600 
9,986 
2,671 

4,413 
3.735 
3.900 
10,042 
2,650 

Discounts 

Advances  to  the  state 

Notes  in  circulation 

General  deposits 

L'Economiste  Franqais,  October  10,  December  26,  1914;  February  6,  1915. 

^  To  those  approved  persons  or  firms  to  whom  current  accounts  have  been 
opened,  the  Bank  of  France  makes  discounts,  in  the  main,  on  satisfactory  com- 
mercial paper  brought  by  merchants  and  manufactiu-ers,  such  as  bills  of  ex- 
change, checks,  bills  to  order,  and  commercial  and  agricultural  warrants  of 
fixed  maturity,  which  have  not  more  than  tlu-ee  months  to  run,  and  which  bear 
the  signatm-es  of  three  persons,  tradesmen,  agricultural  syndicates,  or  others, 
known  to  be  solvent;  and  as  a  bankers'  bank,  on  approved  paper  of  the  private 
banks  presented  for  rediscount  (amounting  normally  to  about  70  per  cent  of 
the  discounts  at  the  bank) . 

Advances  are  loans  made  on  stock  exchange  securities,  easily  convertible  in 
normal  times  into  cash,  usually  only  on  French  Government  securities,  certain 
ones  issued  by  the  departments,  communes,  municipalities,  on  those  of  French 
colonies,  and  French  railways,  varying  from  60  to  80  per  cent  of  their  market 
value. 

The  term  deposits  is  applied  generally  to  funds  left  by  private  persons  whose 
accounts  are  not  active,  and  which  are  in  the  nature  of  reserve  fimds. 


168  CREDIT  OF  THE  NATIONS 

fore  the  war  these  items  together  ran  below  $500,000,- 
000,  but  obviously  rising  with  the  vicissitudes  of  trade 
and  credit  in  times  of  emergency.  The  move- 
bank's  ment  of  the  line  representing  these  joint 
discounts  and   j^gj^g  presents  vcrv  clearly  the  credit    situa- 

advances.  ^  ^  ,  '^  i   i        • 

tion  as  affecting  the  general  business  public. 
Its  immediate  and  greatest  rise  came  in  the  period  when 
no  accounts  were  published,  extending  over  the  end  of 
1914.  By  February  4,  1915,  they  had  climbed  to  about 
$850,000,000,  which  formed  the  peak  of  the  movement 
during  the  whole  war.  Thereafter  there  was  a  steady 
decline  in  the  requirements  of  the  business  public. 

The  moratorium,  however,  left  the  Bank  of  France 
with  a  heavy  burden  of  assets  whose  liquidation  was 
postponed,   and  whose  repayment  in  full  depended  on 

the  uncertainty  of  the  future.  There  was  no 
postponed  guaranty  against  loss  to  the  Bank  by  the  gov- 
ga  ons.  ernment  in  carrying  these  delayed  obligations, 
as  in  the  case  of  the  Bank  of  England.  In  August,  1914, 
at  the  height  of  the  crisis,  the  total  pre-moratorium  paper 
carried  at  the  Bank  of  France  rose  to  $896,000,000,  of 
which  about  $160,000,000  belonged  to  the  districts  occu- 
pied by  the  Germans.^  By  the  end  of  the  year  1915  the 
total  had  been  reduced  to  $367,000,000,  and  by  June, 
1917,  to  $223,000,000.  All  through  the  war  this  item 
was  steadily  reduced;  while  the  discounts  reflecting  the 
general  volume  of  business  kept  about  the  same  level, 
or  even  decreased.  The  loans  on  securities  toward  the 
end  of  1915  showed  a  tendency  to  rise,  being  highest  at 
the  end  of  1916,  and  thereafter  slowly  declining.  The 
general  tendency  of  the  line  in  Chart  IV  representing  the 
total  burden  of  loans  (discounts,  advances  on  securities, 

>  L'Economiste  Francois,  July  1,  1916,  p.  53.  In  1870-1871  the  bank  had 
to  carry  only  $173,700,000  of  moratorium  bills. 


FRENCH  MONEY  AND   CREDIT  169 

and  pre-moratorium  bills)  to  decline  is  due  to  the  repay- 
ment of  postponed  obligations,  with  the  comforting  result 
that  by  the  middle  of  1917  the  total  volume  of  loans  was 
only  a  little  more  than  $100,000,000  above  the  normal 
just  before  the  war.  Clearly,  there  was  no  expansion  of 
credit  to  any  perceptible  amount  in  the  dealings  with 
the  general  business  public.  The  burden  of  pre-mora- 
torium bills  was  accompanied,  as  was  natural,  by  a  les- 
sened volume  of  business  paper.  The  highest  published 
figure  for  all  loans  to  the  public  in  the  European  War  is 
about  $385,000,000  above  the  highest  annual  average  of 
loans  in  the  Franco-Prussian  War.^ 

In  August,  1914,  the  armament  firms  became  very 
busy,  and  some  slight  revival  took  place  in  securities.  In 
September  transportation  became  more  available.  From 
September  to  December  the  withholding  of  xhebank 
deposits  was  slowly  relaxed.  In  October  the  and  the 
moratorium  was  revised.  By  this  time  also 
the  thrift  of  the  country  enabled  some  debtors  to  pay 
off  their  notes  at  maturity  and  the  outlook  showed  im- 
provement; while  the  relaxation  of  the  moratorium  and 
some  small  dealings  in  securities  brought  more  or  less 
money  out  of  hoarding.  The  bourse,  however,  was  tied 
up.  By  friendly  agreement  about  2  per  cent  of  the  deal- 
ings had  been  disposed  of.  In  October  the  settlement  on 
stock  dealings  went  through  with  unexpected  ease.     In 

'  Loans  at  Bank  of  France  (millions  of  francs) : 

1871 1,164  1892 550 

1872 2,089  1907 1,125 

1873 2,299  1908 897 

1874 1,760  April        23,1914 2,136 

1875 1,305  July         31,1914 3,187 

1882 1,151  February  4,  1915 4,243 

1885 784  February  3,  1916 3,534 

1887 578  July         27,1916 3,079 

1890 699  February  8,  1917 3,199 

1891 760  June          7,1917 2,840 


170  CREDIT  OF   THE   NATIONS 

November  the  Bank  of  France  finally  agreed  to  aid  in 
liquefying  the  mass  of  engagements  based  on  securities 
by  advancing  to  the  Parquet  40  per  cent  on  loans  made 
for  carrying  forward  stock  settlements  if  guaranteed  by 
the  Syndicat  des  Agents  de  Change.  This  measure 
brought  only  partial  relief.  As  time  went  on  the  settle- 
ment hung  heavily  over  the  market.  Appeals  were  made 
for  help,  but  the  Bank  was  unwilling  fully  to  liquidate  the 
share  market,  because  securities  were  not  yet  salable, 
and  very  properly  it  did  not  wish  to  swell  the  issue  of 
bank-notes  made  on  frozen  assets.  As  we  shall  soon  see, 
the  notes  were  to  be  swollen  only  too  much  by  the  de- 
mands of  the  government. 

In  normal  conditions  the  sale  and  exchange  of  goods 
and  securities  were  the  basis  of  all  credit  operations;  but 
it  was  expected  that  the  soundness  of  these  transactions 
should  be  tested  at  any  settlement  by  payments  in 
money.  Hence  the  necessity  of  having  such  supply  of 
a  means  of  payment  as  would  meet  the  needs  for  a  me- 
dium of  exchange  in  the  business  community  of  France 
(since  the  deposit-currency  was  not  in  use).  But  beyond 
the  matter  of  the  desired  quantity,  which  was  automati- 
cally regulated  by  redemption  on  demand  in  normal 
times,^  was  the  equally  important  matter  of  the  quality  of 
the  currency.  As  long  as  immediate  redemption  in  gold 
went  on,  the  notes  would  remain  at  par  in  gold. 

But,  following  the  example  of  August  12,  1870,  and 
an  unwritten  European  opinion  seemingly  based  on  the 
fear  of  gold  being  hoarded,  or  slipping  out  of  the  territory, 
or  into  the  hands  of  enemies,  the  Bank  of  France,  by 
Act  of  August  5,    1914,    suspended   specie   payments.^ 

*  Cf.  supra,  pp.  140,  1.51. 

*  Cf.  Journal  Offieicl,  August  6,  1914.  The  Act  applied  also  to  the  Bank  of 
Algeria.     Cf.  Appendix  II,  A. 


FRENCH  MONEY  AND   CREDIT  171 

That  is,  the  Bank  was,  until  otherwise  determined  by  law, 
freed  from  the  obligation  to  redeem  its  notes  in  specie, 
and  the  notes  were  made  legal  tender  for  all  debts,  pub- 
lic and  private  (cours  force) .    In  times  of  peace      _ 

^  ^  ...  Suspension 

the  Bank  has  had  a  tradition  in  favor  of  of  specie 
keeping  a  large  gold  reserve,  not  infrequently  P^y^^^^  s. 
running  above  80  per  cent  of  the  note-issues,  in  the  belief 
that  thereby  discount  rates  could  be  kept  low,  and  a 
sense  of  absolute  security  and  complete  financial  indepen- 
dence could  be  maintained.  In  June,  1914,  the  reserves 
of  gold  were  over  $900,000,000,  or  76  per  cent  of  the  note- 
issues.  In  addition  much  gold  was  held  in  hoards  by  the 
thrifty  French,  estimated  in  1915  at  not  less  than  $700,- 
000,000.^  Also  exports  of  gold,  except  by  the  Bank  of 
France,  were  forbidden.  In  July,  1915  (following  the 
example  of  Germany),  an  appeal  was  made  to  the  public 
to  send  in  gold  to  the  Bank  of  France  to  be  exchanged 
for  notes.  By  October  $160,000,000  had  been  brought 
in  by  individuals;  and,  in  spite  of  shipments 
of  gold  to  England  (in  May,  1915,  $40,000,-  ^^^^''^ 

000)  and  payments  of  $60,000,000  over  its 
counter  by  the  end  of  1914,  the  receipts  of  gold  have 
continued  to  increase  until  the  reserves  of  specie  at  the 
Bank  by  the  end  of  the  third  year  of  the  war  had  risen 
above  $1,100,000,000.^  This  encouraging  growth  in  the 
absolute  sum  of  specie  was,  however,  offset  by  the  dis- 
couraging inflation  of  the  note-issues,  of  which  the  specie 
at  that  time  was  only  28  per  cent  (or  only  24  per  cent  of 
all  demand  liabilities) .  It  is  this  unprecedented  increase 
in  the  volume  of  Bank  of  France  notes  which  furnishes 

'  The  governor  of  the  Bank  estimated  that  in  1908  the  gold  in  France  was 
$1,000,000,000  to  $1,200,000,000,  of  which  the  Bank  then  held  $639,000,000. 
National  Monetary  Commission,  No.  405,  p.  218.  In  1870  the  bank  reserves 
were  about  $250,000,000. 

2  On  October  1,  1914,  the  silver  amounted  to  $64,000,000. 


172  CREDIT  OF   THE   NATIONS 

the  one  outstanding  problem  of  French  credit  operations, 
dominating  all  others. 

It  is  at  once  apparent  that  the  phenomenal  enlargement 
of  the  note  circulation  (see  Chart  IV),  surpassing  that 
of  any  other  country,  has  not  been  made  in  response  to 

the  needs  of  business  for  its  monetary  uses, 
increase  of  An  incrcasc  of  Credit  in  the  form  of  money, 
dul^to^"^^  which  is  the  one  main  currency  of  France, 
advances  to      has  taken  place  without  any  regard  to  the 

demands  of  trade  for  an  increase  in  the  me- 
dium of  exchange.  The  note-issues  of  the  Bank  of 
France  at  the  end  of  the  third  year  of  the  war  were  more 
than  three  times  as  great  as  the  issues  required  for  normal 
trade  in  the  period  preceding  the  war.  Inasmuch  as  the 
inconvertible  notes  drove  all  specie  out  of  circulation,  a 
considerable  issue  of  notes  was  absorbed  by  the  vacuum 
thus  produced;  and  even  notes  were  hoarded  in  large 
amounts,  because  of  the  distrust  of  banks.  The  reason 
for  this  unequalled  inflation,  however,  has  not  been  to  sup- 
ply a  monetary  want,  but  to  meet  a  fiscal  need  of  the  gov- 
ernment. A  system  which  cannot  separate  the  monetary 
from  the  fiscal  requirements  of  the  country  is  dangerous 
alike  to  the  mechanism  of  exchange  and  the  standard  of 
prices  (which  is  certain  to  depreciate)  and  to  the  credit 
of  the  government  in  its  borrowing.  The  excessive  issues 
of  the  Bank  are  due  to  its  advances  to  the  state,  which 
can  be  carried  out  only  by  an  issue  of  notes.  Thus  is 
revealed  the  weak  point  in  the  French  organization  of 
credit.  If  the  Treasury  could  make  its  payments  by 
checks  acceptable  to  its  creditors  drawn  on  sums  placed 
to  its  credit  at  the  Bank,  there  would  be  no  reason  for 
issuing  notes  in  proportion  to  the  advances  to  the  state 
and  hence  no  necessary  derangement  of  the  usual  medium 
of  exchange  in  a  time  of  great  emergency. 


FRENCH  MONEY  AND   CREDIT  173 

The  already  heavy  indebtedness  of  the  nation  and  the 
shock  of  war  forced  the  government  to  borrow  from  the 
Bank  of  France  in  the  beginning  of  the  struggle,  but  the 
advances  have  continued  to  increase  in  a  menacing  man- 
ner, as  may  be  seen  by  the  following  table  (in  millions  of 
francs) : 

1914,  October         1 2,100         1916,  November  30 6,500 

December  24 3,900  December  28 7,400 

1915,  February      4 4,100         1917,  February    15 8,600 

October         7 7,100  March  1 9,000 

December  23 5,200  April  5 9,600 

1916,  April  6 7,100  May  10 10,100 

October         5 8,800  June  7 10,600 

August  9 10,900 

The  advances  to  the  state,  secured  only  by  government 
obligations,  thus  form  the  largest  item  in  the  cover  behind 
the  notes  of  the  Bank,  being  over  54  per  cent  at  the  end  of 
the  third  year  of  the  war.^  The  government, 
receiving  a  credit  from  the  Bank  of  France,  the^stete!*" 
draws  out  bank-notes  and  pays  them  out  for 
purchases  of  war  supplies.  From  the  hands  of  the  pub- 
lic, if  notes  are  not  needed  in  the  circulation,  they  would 
to  some  extent  return  to  the  Bank  in  payments  made 
into  current  accounts.  In  spite  of  the  slight  reductions^ 
in  loans  to  the  goverment  at  the  end  of  1915  and  of  1916 
(which  lowered  the  note-issues,  as  shown  in  Chart  IV),  the 
demands  on  the  Bank  have  steadily  increased.  These  vast 
advances  to  the  state  (as  contrasted  with  the  highest 

*  The  limit  to  the  advances  by  the  Bank  to  the  state  is  fixed  by  a  special 
convention.  On  September  21,  1914,  it  was  fixed  at  6,000,000,000  francs;  on 
May  4,  1915,  it  was  raised  to  9,000,000,000  francs;  on  February  13,  1917.  to 
12,000,000,000  francs. 

"  In  October,  1916,  by  virtue  of  the  placing  of  a  long-term  loan  of  $2,272,- 
000,000,  toward  which  $1,100,000,000  were  paid  in  in  cash,  the  government 
repaid  the  Bank  $440,000,000,  reducing  the  advances  to  the  state  to  $1,260,- 
000,000. 


174  CREDIT  OF  THE  NATIONS 

figure  in  the  War  of  1870  of  $285,000,000)  to  over  $2,000,- 
000,000,  so  far  beyond  anything  in  the  previous  history 
of  the  Bank,  seem  ahnost  incredible.  The  only  means 
by  which  the  state  can  reduce  this  debt  to  the  Bank  are 
taxation  of  her  people  or  borrowing  by  short  or  long  term 
obligations.  When  advances  by  the  Bank  are  not  possi- 
ble, funding  operations  by  the  Treasury  become  necessary. 
As  is  well  known,  a  legal  limit  was  set  on  the  maximum 
note-issues.  Before  the  war  began  it  was  fixed,  Decem- 
ber, 1911,  at  6,800,000,000  francs.^  On  August  5,  1914,^ 
,.  .  the  limit  was  at  once  raised  to  12,000,000,000 

Limit  to 

note-issues  francs;  on  May  11,  1915,  to  15,000,000,000; 
raised.  March  15,  1916,  to  18,000,000,000;  February 

15,  1917,  to  21,000,000,000,  and  September  10,  1917,  to 
24,000,000,000.  By  August  9,  1917,  the  notes  in  circu- 
lation had  risen  to  20,434,000,000  francs— or  $4,087,000,- 
000 — a  sum  of  inconvertible  notes  alone  (irrespective  of 
national  bonds,  treasury  bills,  etc.)  about  $1,000,000,000 
greater  than  the  whole  debt  of  the  United  States  at  the 
end  of  the  Civil  War.^  This  unexampled  expansion  of 
the  bank-notes  is  directly  due  to  the  prodigious  advances 
to  the  state.^ 

We  are  faced  directly  with  the  question  as  to  the  fun- 

1  From  3,200,000,000  francs  at  the  end  of  tTie  Franco-Prussian  War  it  had 
been  raised,  January  28,  1893,  to  4,000,000,000;  November  17,  1897.  to  5,000.- 
000,000,  and  February  9,  1906,  to  5,800,000,000  francs. 

^  By  Act  of  August  5,  1914,  the  limit  can  be  increased  by  the  Conseil  d'Etat 
on  the  advice  of  the  Ministry  of  Finance.     Cf.  Appendix  H,  A. 

^  George  H.  Pendleton,  once  candidate  for  the  presidency  in  the  United 
States,  proposed  what  was  regarded  as  the  most  extreme  greenback  policy  of 
printing  enough  inconvertible  paper  to  pay  off  our  whole  national  debt,  and 
was  easily  defeated.  But  such  a  policy  has  actually  resulted  in  France,  a 
country  noted  for  its  sound  monetary  policy,  in  issues  larger  than  the  debt 
caused  by  our  Civil  War. 

*  The  notes  of  the  Bank  of  Russia  by  April,  1917,  had  been  increased  to 
11,153,000,000  of  roubles,  which  at  par  (51  cents)  would  amount  to  $5,688.- 
000,000.  Thus  the  Russian  Bank  alone  has  the  unenviable  record  of  having 
issued  more  notes  than  the  Bank  of  France. 


FRENCH  MONEY  AND   CREDIT  175 

damental  soundness  of  the  fabric  of  credit  thus  built  up, 
which  rests  upon  the  Bank  of  France,  and,  therefore, 
upon  the  quahty  of  the  assets  on  which  the    „ 

,  .  ^  .  Soundness  of 

notes  have  been  issued  to  such  exceptional  the  credit 
amounts.  These  notes,  as  explained,  are  is- 
sued only  upon  specie,  statutory  loans  to  merchants  and 
advances  on  securities,  and  advances  to  the  state. ^  The 
specie  has  been  steadily  increasing  to  a  sum  never  before 
equalled.  The  discounts  have  remained  at  a  safe  figure, 
showing  no  inflation.  The  advances  on  securities  have 
been  rising  somewhat  (but  only  about  $78,000,000  above  the 
normal  of  July,  1914).  The  most  obvious  sign  of  return- 
ing internal  health  has  been  the  reduction  in  the  volume 
of  pre-moratorium  bills — which,  as  frozen  assets,  might 
have  been  regarded  as  weakening  the  support  behind  the 
notes— from  $896,000,000  to  $^223,000,000.  Indeed,  the 
postponed  obligations  form  less  than  7  per  cent  of  the 
assets  behind  the  notes.  As  to  these  elements  in  the 
cover  for  the  notes,  there  is  no  cause  for  lack  of  confi- 
dence as  to  how  the  future  is  to  be  met.  The  same 
cannot  be  said,  on  the  other  hand,  about  the  amazing 
increase  of  notes  based  on  the  advances  to  the  state. 
Their  constant  increase  advertises  the  inability  of  the 
Treasury  to  borrow  in  the  market  by  normal  fiscal 
methods  sufficient  funds  to  meet  the  enormous  expenses 
of  the  war.  Thus  the  weakness  of  the  fiscal  situation  is, 
by  the  French  organization  of  money  and  credit,  inevi- 
tably affecting  the  soundness  of  the  note-issues  of  the 
Bank  of  France,  the  very  nerve-centre  of  the  whole  sys- 
tem of  credit.  In  short,  the  stability  and  future  of 
French  credit  depend  on  the  liquidity  of  the  obligations 

'  There  is  no  legal  percentage  fixed  for  the  amount  of  commercial  paper, 
specie,  etc.,  relatively  to  the  whole  issue  of  notes,  as  in  Germany  and  other 
countries. 


176  CREDIT  OF  THE  NATIONS 

issued   by   the  state.     This   is   the  crux  of  the  whole 
matter. 

§  5.  It  has  long  been  a  stock  subject  of  remark  that, 
in  times  of  war,  governments  seem  unable  to  resist  the 
temptation  to  confuse  the  monetary  with  the  fiscal  func- 
tions of  the  state,  and  thereby  issue  forms  of 
needs  differ  moucy  as  a  mcans  of  borrowing.  The  obvious 
needs^^*^^  trutli  that  rcasous  for  changing  the  quantity 
of  money  in  circulation,  complicated  as  they 
must  be  with  difficult  questions  as  to  the  needs  of  trade, 
are  of  an  entirely  different  sort  from  the  reasons  which 
have  to  do  with  the  ability  of  the  Treasury  to  place  bonds 
and  borrow  large  sums.  The  shallow  thinking  which 
assumes  that  the  getting  of  capital  is  the  more  easy  the 
greater  the  number  of  counters  used  in  exchanging  goods, 
or  the  theory  that  issues  of  demand  forms  of  indebtedness 
which  serve  as  money  are  loans  without  interest,  seem  to 
lie  behind  this  common  delusion.  What  has  escaped 
attention  in  a  crisis  are  the  inevitable  after-effects  on  the 
value  of  the  paper,  the  tendency  to  over-issue,  the  depre- 
ciation of  the  money,  the  consequent  rise  of  prices,  the 
increased  cost  of  living  and  of  all  government  purchases, 
the  derangement  of  the  foreign  exchanges,  the  growth  of 
speculation  and  wide  disturbances  in  trade.  A  deranged 
currency  introduces  uncertainty  into  production,  and  an 
upheaval  of  trade  makes  borrowing  by  the  state  more 
expensive  and  less  easy.  Moreover,  the  resort  to  incon- 
vertible paper  creates  a  belief  in  the  incompetency  of  the 
management  of  the  Treasury  and  lowers  its  credit  in  ob- 
taining loans. 

The  path  by  which  France  wandered  into  the  suspen- 
sion of  specie  payments  and  into  excessive  issues  of  bank- 
notes may  have  been  different  from  the  general  one  just 


FRENCH  MONEY  AND  CREDIT  177 

indicated  (which  was  the  one  followed  by  the  United 
States  in  the  Civil  War),  but  the  consequences  were  the 
same.  In  France  this  errancy  is  due  to  the  peculiarity 
of  her  monetary  habits  and  of  her  organization  of  credit. 
To  us  it  seems  almost  inconceivable  that  a  large  loan  can- 
not be  made  to  the  state  without,  by  the  very  act  of 
granting  the  credit,  increasing  pro  tanto  the  volume  of 
the  circulation.  If  the  experiences  of  the  European  War 
are  to  teach  wisdom,  it  seems  hardly  possible  that  the  ob- 
solete habit  in  France  and  Germany  of  making  payments 
chiefly  by  passing  note-issues  from  hand  to  hand,  thus 
carrying  with  it  the  unnecessary  expansion  of  money 
whenever  loans  are  increased,  should  be  hereafter  main- 
tained. It  is  a  habit  also  which  cuts  them  off  from  the 
efficiency  of  a  more  modern  organization  of  credit,  such 
as  is  possessed  by  Great  Britain  and  the  United  States. 
But  there  is  far  more  to  the  matter  than  this.  As  a 
general  principle  the  rule  should  belaid  down  that  the  fiscal 
should  be  kept  wholly  separated  from  the  monetary  opera- 
tions of  the  state.  If  the  standard  of  prices  and 
contracts  were  kept  undisturbed,  the  costs  of       Fiscal 

^  ^  ^  monetary 

supplies  and  the  whole  magnitude  of  national  and  credit 
debts  would  be  freed  from  the  results  of  de-  confused, 
preciation.  To  mingle  the  monetary,  the 
credit,  and  the  fiscal  functions,  as  is  done  in  France,  seems 
triply  fatuous.  There  the  central  institution  of  credit  is 
at  the  same  time  the  issuer  of  money;  by  French  mone- 
tary habits  a  credit  operation  is  necessarily  carried 
through  by  the  issue  of  notes;  and  then,  as  an  additional 
complication,  forms  of  money  are  forced  out,  not  because 
of  the  needs  of  business,  but  in  direct  connection  with  a 
critical  condition  of  the  public  finances  by  large  advances 
from  the  Bank  to  the  state.  The  contrast  with  similar 
operations  in  England  is  full  of  significance.     There  the 


178  CREDIT  OF  THE  NATIONS 

governmental  borrowings  rise  and  fall,  the  fiscal  dealings 
go  on  between  the  Treasury  and  its  creditors,  without  in 
any  way  affecting  the  separate  function  of 
England  in  Supplying  the  money  of  the  nation.  More- 
better  over,  the  fiscal  operations  of  the  Treasury  are 

position.  .     .  '^  .  p 

kept  distinct  from  the  credit  operations  of 
the  banking  department  of  the  Bank  of  England  which 
discounts  for  the  business  community.  In  the  corre- 
sponding crisis  in  England  the  placing  of  government 
loans  went  on  without  deranging  the  currency  or  private 
credits,  except  so  far  as  Lloyd  George  mistakenly  copied 
wrong  European  practice  by  issuing  government  currency 
notes.  The  difference  in  the  working  of  the  French  and 
the  English  systems  is  strikingly  shown  by  a  comparative 
study  of  Charts  II  and  IV,  especially  in  regard  to  note- 
issues  and  discounts.  As  will  be  seen  later  (in  Chart  V) 
the  theory  of  the  German  Reichsbank  is  not  in  this  re- 
spect an  improvement  on  that  of  the  Bank  of  England. 
In  France  the  Bank  is  in  the  difficult  position,  not  of  plac- 
ing state  loans  with  the  public  as  the  agent  of  the  Trea- 
sury, but  of  having  to  lend  to  it  directly,  just  when  a 
crisis  in  credit  is  developing  in  the  world  of  private  busi- 
ness. The  worth  of  the  system  which  requires  the  bank 
of  issue  also  to  lend  to  the  state  in  the  form  of  notes  and 
thereby  gives  rise  to  very  serious  complications  in  the 
general  level  of  prices  of  all  goods,  the  rates  of  foreign  ex- 
change, and  a  long  period  of  inconvertibility  after  the  war, 
is  open  to  question.  Would  it  not  be  infinitely  better  for 
the  government  to  borrow  by  normal  fiscal  methods  from 
the  public,  and  not  at  the  same  time  wreck  the  monetary 
system  by  borrowing  from  the  Bank  ?  It  would 
FrMce°*°  seem  to  the  impartial  observer  that  the  expe- 
rience of  this  war  has  demonstrated  the  weak- 
ness of  a  tradition  which  confuses  the  monetary  and  the 


I 


FRENCH  MONEY  AND   CREDIT  179 

fiscal  functions  of  a  great  nation  in  its  organization  of 
money  and  credit.  By  way  of  contrast,  the  system  of 
Great  Britain  stands  out  strikingly  sound,  entailing  no 
such  dangerous  consequences  after  the  war,  and  offering 
an  example  to  this  country,  as  it  is  entering  upon  enor- 
mous war  expenditures,  to  avoid  the  issue  of  forms  of 
money  as  a  means  of  increasing  its  credit  to  the  public. 

§  6.  The  suspension  of  specie  payments  alone  must 
have  brought  the  notes  to  a  discount.  But  when  to  sus- 
pension was  added  the  increase  of  the  inconvertible  notes 
to  an  unparalleled  volume,  it  was  inevitable  that  the 
paper  should  seriously  depreciate. 

The  extent  of  the  inflation  of  the  currency  by  the  end 
of  the  third  year  beyond  the  normal  requirements  before 
the  war  is  at  least  40  per  cent.    The  governor  of  the  Bank^ 
estimated  the  gold  of  France  in  1908  at  no 
more   than   $1,200,000,000,    which,    with   the    ^^**'*"'°^ 
bank-issues  early  in  1914  of  another  $1,200,-    inconvertible 

•^  T    7         J        currency. 

000,000,  made  a  total  ch-culation  of  $2,400,- 
000,000.  Since  the  notes  have  reached  nearly  $4,000,- 
000,000,  there  is  an  excess  over  a  pre-war  basis  of  about 
$1,600,000,000.  If,  then,  we  assume,  with  Professor 
Gide,-  that  not  only  all  the  gold  but  also  some  $600,- 
000,000  of  notes  have  been  hoarded  or  withheld  from 
circulation,  there  yet  remains  an  expansion  of  the  money 
amounting  to  $1,000,000,000,  or  perhaps  40  per  cent 
beyond  that  in  use  before  the  war.  As  the  war  goes  on 
there  will  continue  to  be  loans  to  the  state  and  probably 
an  increasing  volume  of  notes.     There  can  be  little  doubt 

*  Supra,  p.  171,  n.  1. 

'  In  Kirkaldy's  Labour,  Finance,  and  the  War  (p.  252),  Professor  Gide  argues 
that  (April  10,  1916)  the  circulation  had  not  been  increased,  because  all  the 
gold  had  disappeared,  and  that  3  milliards  out  of  a  total  of  15  milliards  francs 
of  notes  had  also  been  hoarded. 


180  CREDIT  OF  THE  NATIONS 

already  of  a  very  serious  inflation  of  note-issues,  an  infla- 
tion, too,  quite  unrelated  to  the  demands  of  trade  for  a 
medium  of  exchange.  The  need  of  a  large  quantity  of 
notes  for  payments  to  the  army  cannot  be  greater  than 
the  civilian  needs  for  the  same  persons  when  engaged  in 
the  production  rather  than  in  the  destruction  of  goods. 
Therefore  the  large  payments  needed  for  the  soldiers  can- 
not be  regarded  as  an  increased  need  for  notes;  they  are 
rather  only  a  reason  for  larger  loans  by  the  state,  which 
ought  not  to  be  synonymous  with  a  larger  quantity  of 
the  circulation. 

In  the  over-issue  of  notes  by  the  Bank  of  France  there 
is  an  illustration  of  the  principle  that  immediate,  not  ulti- 
mate redemption  of  paper  money  is  always  necessary  to 
its  circulation  at  par.     If  specie  can  be  ob- 

Immediate  .  •  p    i  i     •  i 

redemption  tamed  ou  presentation  or  the  notes,  their  value 
vaSi^^and*^*  cannot  vary  from  that  into  which  they  are 
quantity  of  convertible;  moreover,  no  more  notes  can  re- 
main in  circulation  than  are  actually  needed 
by  the  public,  as  decided  by  their  own  acts  in  retaining 
or  redeeming  them,  irrespective  of  any  wishes  of  the 
issuer;  so  that  immediate  redemption  automatically  de- 
termines the  quantity  of  notes  needed  by  trade.  But, 
when  redemption  ceases,  both  the  value  and  the  quantity 
of  the  notes  become  a  matter  of  speculation.  The  dis- 
count on  the  notes  reflects  the  opinion  as  to  the  certainty 
and  future  redemption  of  them.  If,  as  in  the  case  of  the 
Bank  of  France,  large  holdings  of  gold  are  retained  and 
not  paid  out,  that  fact  may  affect  the  possibility  of  re- 
demption in  the  future.  But  even  large  holdings  of  gold 
behind  the  notes  will  not  keep  them  at  par  if  there  is  no 
convertibility  at  sight.^ 

'  In  the  War  of  1870-1871,  under  the  skilful  management  of  such  financiers 
as  Thiers  and  Leon  Say,  the  circulation  was  saved  from  extreme  inflation;  and 


FRENCH  MONEY  AND  CREDIT  181 

Yet  this  fund  of  gold  does  have  some  effect;  how  much, 
is  an  interesting  question.     In  France  and  Germany  it 
is  evidently  assumed  that  an  accumulated  stock  of  gold 
will  maintain  confidence  in  the  notes.     The 
possibility    of    redemption    by    the   Bank    of   retaining 
France,  however,  is  influenced  by  other  mat-    gp^d  on  value 

•^  _  ^  of  notes. 

ters  than  the  stock  of  gold,  which  is  only 
bout  28  per  cent  of  the  notes.  Since  54  per  cent  of  the 
cover  for  the  notes  is  made  up  of  government  debt,  and 
since  the  debt  of  the  state  has  risen  beyond  all  measure 
of  experience,  it  is  quite  clear  that  the  Treasury — even 
after  the  end  of  the  war — will  be  loaded  to  its  full  capacity 
by  the  issue  of  enormous  funding  loans,  so  that  it  will  be 
obliged  to  postpone  the  repayment  of  its  debt  to  the 
Bank  as  long  as  possible.  Inasmuch  as  suspension  con- 
tinued seven  years  (to  January  1,  1878)  after  the  end  of 
the  War  of  1870-1871,  when  advances  to  the  state 
totalled  only  $294,000,000,  the  period  of  postponement 
when  the  debt  to  the  Bank  is  already  over  $2,000,000,000, 
is  likely  to  be  much  longer.  Hence  the  possibility  of 
redemption,  even  for  a  considerable  period  of  years,  is 
seriously  compromised  and  must  be  reflected  in  the 
depreciation  of  the  notes.  Ultimate  redemption,  there- 
fore, even  with  a  large  fund  of  gold  in  sight,  but  locked 
up,  cannot  have  a  potent  influence  in  preventing  depre- 
ciation. 

It  is  not  possible,  of  course,  to  measure  the  depreciation 
of  the  notes  solely  by  the  higher  level  of  prices,  because 
prices  are  affected  by  other  forces  than  the  quantity  of 

the  foreign  exchanges  (especially  in  connection  with  the  payment  of  the  In- 
demnity of  War)  were  handled  in  so  masterly  a  manner  that  there  was  very 
little  depreciation  of  the  bank-notes  during  the  suspension  of  specie  payments 
for  seven  and  a  half  years.  In  one  extraordinary  cas^  of  exchange  on  London 
the  premium  on  gold  rose  to  4  per  cent,  but  in  the  period  after  the  end  of  the 
war  the  paper  stayed  close  to  par. 


182  CREDIT  OF  THE   NATIONS 

the  circulation  or  the  premium  on  gold :  Yet  (a)  the  efiFect 
of  depreciation  in  the  notes  would,  in  itself,  have  a  di- 
rect influence  on  raising  prices  to  the  extent  of  that  de- 
preciation. For  instance,  the  prices  of  wheat  or 
SiT  rices°°  ^^^^  imported  into  France  from  a  gold-stand- 
ard country  like  the  United  States  would  rise 
in  proportion  to  the  depreciation  of  the  notes  relatively 
to  gold  because  more  notes  would  pro  tanto  have  to  be  of- 
fered to  equal  the  gold  price.  That  could  not  be  avoided. 
But  (6)  prices  in  France  might  rise  higher  than  the  level  in- 
dicated by  depreciation  of  the  notes,  for  reasons  entirely 
independent  of  the  quality  of  the  circulation.  Prices  of  all 
goods  directly  or  indirectly  needed  for  the  war  would  rise, 
due  to  the  necessity  for  immediate  delivery,  to  the  sudden 
increase  of  demand  from  the  government,  to  the  increased 
cost  of  production  arising  from  the  withdrawal  of  labor 
into  the  army,  and  to  the  greater  expense  be- 
rise  for  causc  of  War  couditious  in  obtaining  raw  mate- 

other°^an  ^^^^^  ^^^  manufacturer's  supplies  of  every  kind. 
the  volume  (c)  Both  special  and  general  conditions  would, 
in  addition,  produce  scarcity  prices  for  many 
articles,  such  as  foodstuffs  and  coal.  The  occupation  of 
her  coal-fields  by  German  armies  made  coal  scarce  and 
high  to  France.  The  seasons  and  the  lack  of  labor  have 
reduced  the  grain-crops  and  the  supply  of  food  the  world 
over.  The  shortage  in  merchant  shipping  and  the  abnor- 
mally high  freight  charges  would  almost  alone  explain  a 
serious  rise  of  prices.  For  all  these  obvious  reasons,  there- 
fore, we  can  account  for  the  high  range  of  French  prices 
without  being  obliged  to  explain  the  rise  by  the  increased 
quantity  of  notes  added  to  the  circulation.  This  increased 
volume  of  inconvertible  paper  is  influential  in  affecting  the 
depreciation  of  the  paper;  and  prices  of  goods  expressed 
in  a  depreciated  paper  will,  of  course,  rise.     There  is  no 


A 


FRENCH  MONEY  AND   CREDIT  183 

reason,  however,  to  suppose  that  prices  would  have  risen 
simply  because  more  notes  were  in  circulation,  if  those 
notes  had  been  redeemable  in  gold.  The  depreciation  of 
the  paper  franc  in  gold-using  neutral  countries,  such  as 
the  United  States,  was  about  12  per  cent,  and  at  the  end 
of  the  third  year  of  the  war  stood  around  10  per  cent. 
The  increase  in  bank-notes  was  more  than  three-fold. 

Nor  did  prices  rise  in  any  direct  ratio  to  the  increase  in 
the  quantity  of  the  circulation.     The  prices  of  thirteen 
food  articles  of  general  consumption  computed  from  fig- 
ures in  cities  of  over  10,000  inhabitants,  for  the 
whole  of  France  had  risen  from  the  third  quar-    ^^lt°*  ?  "^® 

^  in  prices. 

ter  of  1914  to  the  end  of  the  second  quarter  of 
1916  by  37  per  cent.^  How  uneven  were  the  changes  of 
prices  in  different  groups  of  commodities  may  be  seen  in 
the  following  table,^  which  indicates  that  special  causes 
were  at  work.  Such  unevenness  cannot  be  explained  by 
a  single  cause  like  the  increase  in  the  quantity  of  money 
in  circulation. 

§  7.  In  its  foreign  operations  the  credit  organization 
of  France  has  been  put  to  a  severe  test.  As  with  other 
belligerents,  there  has  been  an  upheaval  in  French  foreign 
trade,  an  inability  of  foreigners  to  pay   their   debts   at 

*  Bulletin  de  la  Statistique  gSnerale  de  la  France,  tome  V,  Juillet,  1916,  p.  356. 
Gide  (op.  cit.,  p.  251)  gives  the  rise  in  April,  1916,  as  35  per  cent  for  France  as 
against  50  per  cent  in  England  and  100  per  cent  in  Germany.  If  the  quantity 
theory  were  true,  prices  ought  to  be  much  higher  in  France  than  in  England  or 
Germany. 

2  Ibid.,  pp.  306-312. 

Rise  of  Prices  from  Middle  of  1914  to  Middle  of  1916 

Freights 300-400%         Grains  (Paris) 64% 

Chemicals 130%  Sugar,  rice,  etc.  (Bordeaux)  217% 

Fodder  (Paris) 74%         Silk  (Lyons) 36% 

Vegetable  oils  (Paris) 116%  Cotton,  wool,  leather,  etc. 

Metals  (Paris) 70%             (Havre) 67% 

Cotton  yarn  (Rouen) 47% 


184  CREDIT  OF  THE  NATIONS 

maturity,  a  falling  off   in   exports,  increased   purchases 
abroad  of  coal,  food,  steel,  and  the  whole  list  of  war 

supplies,  and  a  reversal  of  the  usual  trade 
SSr^^Sade    balance  in  her  favor.     The  foreign  exchanges 

have,  of  course,  been  thrown  into  confusion. 
But  the  conditions  affecting  exchange  on  France  are 
different  from  those  on  England,  and  a  comparative  study 
discloses  many  interesting  phases  of  the  foreign  exchange 
problem. 

Harking  back  to  the  causes  influencing  the  levels  of 
foreign  exchange,  when  discussing  English  credit,^  we 
find  the  same  general  forces  at  work  in  both  countries, 

with  the  one  marked  exception  for  France  of 
Effect  of  .  ^  .    . 

depreciation  a  depreciated  currency.  Ihe  characteristic 
on  exchange,    fg^^^p^   ^f   ^jjg    exchange   problem    which    is 

brought  out  in  the  experience  of  France  is  the  effect  of 
the  depreciation  of  the  bank-notes.  Some  discussion  has 
been  devoted  to  the  attempt  to  measure  the  discount  on 
the  notes  by  the  price  of  exchange.  The  determination 
of  the  exact  percentage  of  depreciation,  however,  is  not 
so  important  as  the  cause  of  it,  to  which  attention  has 
been  given  in  the  last  section.  In  passing  on  to  the  re- 
lation of  the  depreciated  notes  to  the  foreign  exchanges, 
granting  a  depreciation  of  the  legal  circulation,  we  are 
given  thereby  a  fundamental  cause  of  at  least  a  part  of 
the  rise  in  the  level  of  quotations  for  foreign  exchange. 
A  buyer  in  New  York  of  a  bill  on  Paris  will  not  give  par 
for  it  in  gold  when  he  knows  that  the  bill  when  presented 
for  payment  to  a  French  bank  will  be  paid  in  francs, 
which  are  at  a  discount  of  10  per  cent  on  gold.  He  will 
give  no  more  than  the  value  of  the  currency  in  which  the 
bill  is  redeemed.  That  is,  exchange  (charges,  etc.,  apart) 
necessarily  follows  the  value  of  the  money. 

» Suvra,  p.  125. 


FRENCH  MONEY  AND   CREDIT  185 

It  is  inevitable  that  exchange  should  rise  if  the  notes  de- 
preciate— and  for  the  same  reason  that  the  price  of  any 
commodity  would  rise.  Of  course,  if  there  were  redemp- 
tion of  the  notes  in  gold  on  demand,  exchange 
would  stay  within  the  shipping-points.  The  shipments 
special  fact  to  be  noted  for  France  is  that  H^^^^  ..  > 
the  customary  means  of  payment  in  interna- 
tional trade,  the  bill  of  exchange,  is  not  now  redeemable  in 
gold.  The  case,  therefore,  is  the  same,  and  governed  by 
the  same  principles  as  that  of  an  inconvertible  domestic 
currency.  The  effect  of  inconvertibility  on  the  interna- 
tional means  of  payment  is  produced  by  the  disappearance 
of  the  shipping-point  for  gold.  If  gold  ceases  to  move 
when  the  play  of  demand  and  supply  of  bills  brings  the 
quotations  to  the  point  where  it  is  profitable  to  ship  gold 
rather  than  pay  the  high  price  for  bills,  the  general  effect 
on  the  value  of  bills  is  practically  the  same  as  the  effect  of 
suspension  of  gold  payments  on  the  value  of  the  Bank  of 
France  notes.  It  removes  the  support  which  holds  up 
their  value.  Once  that  support  is  withdrawn,  the  value  of 
bills,  just  as  that  of  bank-notes,  is  thereby  subject  to  all 
the  other  influences,  such  as  rumor,  speculation,  and  the 
fortunes  of  war,  which  may  affect  the  return  to  redemp- 
tion in  the  more  or  less  remote  future.  One  exception  is 
to  be  noted.  Since  gold  has  become  the  accepted  basis 
for  international  settlements,  it  is  conceivable  that,  after 
the  war,  shipments  of  gold  might  be  restored  even  before 
redemption  of  the  notes  in  gold  had  been  reached;  conse- 
quently, bills  might  return  to  par  in  gold  before  that  of 
the  notes — provided  the  convertibility  of  bills  were  sep- 
arated from  that  of  notes. 

It  must  be  obvious,  then,  that  the  price  of  exchange 
first  follows  the  level  of  the  value  of  the  money  in  which 
it  is  paid,  just  as  a  float  follows  the  level  of  water  in  a 


«H:, 


186  CREDIT  OF  THE   NATIONS 

reservoir.  As  the  notes  go  back  to  par  the  level  of  ex- 
change will  follow.  In  normal  times  of  peace  bills  can- 
not rise  or  fall  beyond  the  quotations  which 
foUowthe  cover  the  cost  of  shipping  gold;  when  those 
value  of  points  are  reached,  gold  is  sent;  that  is,  imme- 

diate redemption  in  gold  takes  place.  Since 
August  5,  1914,  these  limits  have  been  removed.  In  other 
words,  there  is  no  fixed  level  of  the  water  in  the  reser- 
voir; it  may  go  down  indefinitely;  consequently,  the 
float  on  its  surface  will  follow  the  changing  level. 

Those  who  are  intimately  affected  by  the  course  of  the 
war  and  are  unwilling  to  admit  the  depreciation  of  the 
notes, ^  are  disposed  to  believe  that  the  fall  in  the  ex- 
change is  due  solely  to  the  adverse  balance  of  trade  and 
not  at  all  to  the  depreciation  of  the  currency.  The  enor- 
mous inflation  of  the  currency,  the  suspension  of  specie 
payments,  could  not  help  causing  a  decline  in  the  value  of 
the  notes;  some  rise  of  prices  and  the  fall  of  exchange 
in  neutral  gold-using  countries  would  be  inevitable  con- 
sequences of  that  decline  in  the  value  of  the  notes.  If 
the  balance  of  trade  had  been  reversed,  the  exchanges 
would  have  been  kept  around  par  by  the  shipment  of  gold. 
That  being  prohibited,  there  is  no  support  to  the  level 
of  the  exchanges. 

Then  must  come  into  play,  if  the  level  is  to  be  sus- 
tained, the  operation  of  the  fundamental  forces  under- 
lying international  credit.  The  situation  of  France  made 
War  ch  k  d  ^^  impossible  to  greatly  increase  her  exports 
French  of  goods  in  Order  to  help  pay  for  the  much- 

expo  s.  needed    imports    of    food    and    war   supplies. 

The  dislocation  in  trade  was  very  serious.  In  five  months 
of  1915,  as  compared  with  the  same  months  in  1914,  the 
imports  had  declined  25  per  cent  and  exports  58  per 

*  CJ.  Gide,  op.  cil.,  p.  252.     The  same  view  is  held  in  Germany. 


FRENCH  MONEY  AND   CREDIT 


187 


cent.^  In  1915  the  industries  of  Lyons  had  not  shown 
recovery;  but  the  china,  glass,  woodworking,  and  metal 
industries  showed  improvement,  while  there  was  a  gain 
of  perhaps  20  per  cent  over  the  whole  field.  Workers  for 
the  government,  as  well  as  those  in  the  chemical,  leather, 
cotton,  woollen,  canned  food,  chain,  motor,  and  engineer- 
ing industries,  were  occupied  night  and  day.  Those  for- 
merly producing  for  export  were  now  largely  occupied  in 
supplying  war  goods.  The  balance  of  payments,  having 
been  in  favor  of  France  before  the  war,  so  continued  for  a 
time  after  war  began.  The  franc  did  not  fall  below  par 
until  May,  1915.  It  was  then  that  the  merchandise  ac- 
count was  reversed.  In  1915  imports  exceeded  exports 
by  $1,000,000,000,  and  in  1916  by  over  $2,500,000,000. 
The  purchases,  especially  from  the  United  States,  were 
very  heavy.  The  payment  for  the  imports,  however, 
could  be  offset  only  to  a  reduced  extent  by  the  exports 
of  goods  (although  there  was  a  noticeable  gain  in 
1916). 

The  resort  to  sending  securities  was  tried,  but  France 
had  not  accumulated  American  securities  in  such  amounts 
as  she  had  those  of  other  countries.  It  is  estimated^  that 
the  French  held  in  1912  over  $8,000,000,000  of  foreign 
securities  (out  of  total  security  holdings  of  about  $22,000,- 

*  Foreign  Trade  of  France  (Merchandise  for  Home  Use)  in  MiLLioNa 

OF  Francs 


1912 


1914 


Imports . 
Exports . 


4,162 
3,224 


4.240 
3,372 


3,575 
1,415 


3,550 
1,449 


4,459 
1,717 


The  effects  of  the  war  are  seen  in  the  higher  imports  in  1916,  due  to  larger 
miports  of  food  and  manufactures.  The  falling  off  in  exports  is  mainly  in 
manufactures  and  materials  for  manufacture.  Bulletin  de  la  Statistique  geni- 
rale  de  la  France,  tome  V,  p.  299. 

^  Yves  Guyot,  "The  Amount,  Direction,  and  Nature  of  French  Investments," 
Annals  American  Academy,  LXVIII,  pp.  8,  12,  17. 


188  CREDIT  OF  THE   NATIONS 

000,000);  but  the  estimate  of  $1,000,000,000  in  American 

investments  is  thought  to  be  far  too  high.     No  doubt  our 

securities,  whatever  their  sum  total,  were  sent 

Loans  from 

the  United  homc  to  be  rcahzed  upon  to  cover  French  pur- 
chases. But  the  main  dependence  was  on  the 
securities  of  other  neutral  countries  held  by  Frenchmen. 
In  July,  1916,  the  Minister  of  Finance  asked  the  owners 
of  such  securities  to  lend  them  to  the  government,  which 
gave  in  return  a  receipt  negotiable  on  the  bourse  and  at 
once  advanced  to  the  owners  one-fourth  of  the  net  annual 
income.  Thus  provided  with  what  was  reported  at  the 
time  to  be  about  $200,000,000  of  such  investments,  France 
was  able  to  use  them  as  collateral  for  loans  to  pay  for  pur- 
chases here.^  Also  a  number  of  important  French  indus- 
trial concerns  united  in  borrowing  from  private  American 
bankers,  in  order  to  pay  for  exports  to  France,  giving 
French  Government  obligations  and  bonds  from  neutral 
countries  as  collateral.  The  French  merchants  drew  on 
the  New  York  banks,  which  accepted  the  three  months' 
paper,  with  an  agreement  to  make  five  renewals  if  desired. 
Thus  French  acceptances  appeared  in  our  money  centres, 
and  to  that  extent  obviated  a  resort  to  the  exchange  mar- 
ket. After  the  United  States  entered  the  war  our  gov- 
ernment loaned  directly  to  that  of  France.  Such  measures 
to  a  large  extent,  of  course,  offset  the  purchases  of  France 
in  this  country.  That  is,  the  creation  of  credits  abroad 
by  France  saved  the  export  of  gold  when  exports  of  goods 

'  Immediately  a  loan  of  $100,000,000,  repayable  in  three  years,  at  5  per  cent, 
guaranteed  by  the  syndicate  of  the  bourse,  was  placed  in  New  York  with  the 
American  Foreign  Securities  Corporation,  composed  of  banks  such  as  J.  P. 
Morgan  &  Co.,  First  National  Bank,  National  City  Bank,  Guaranty  Trust  Com- 
pany, and  others,  which  issued  and  sold  their  own  obligations,  protected  by  the 
securities  of  neutral  states  that  were  guaranteed  by  the  French  Government. 
The  dollar  was  fixed  at  5.18  francs. 

April  1,  1917,  the  French  Government  placed  a  loan  of  $100,000,000  in  this 
country,  by  its  own  direct  obUgations,  supported  by  collateral,  -dt  5'A  per  cent. 


FRENCH  MONEY  AND   CREDIT  189 

fell  off,  and  postponed  the  settlement — which  is  the  char- 
acteristic of  credit — to  the  future. 

Only  after  all  other  devices  fail  in  balancing  the  inter- 
national account  does  gold  move.     Even  in  this  extraor-" 
dinary  emergency  France  did  not  support  her  exchanges, 
as  we  have  seen,  by  the  shipment  of  gold. 
And  yet  an  indirect  use  was  made  of  her  large     shipments  of 
gold  supply.     In  three  months  (April,  May,     ^° 
and  June)  of  1916,  the  Bank  cf  France  sent  to  London 
about  $100,000,000  of  gold,  receiving  in  return  a  credit 
on  which  she  could  draw  for  three  times  as  much,  thus 
aiding  England  with  gold,  as  she  had  several  times  before 
(in  May  and  September,  1915),  in  supporting  the  exchange 
market  on  New  York. 

The  working  of  the  foreign  exchanges,  involving,  as  it 
does,  matters  of  international  credit,  is  affected,  as  has 
been  said,  not  only  by  all  the  forces  which  appear  in  the 
case  of  England,  but  also  by  the  complications  arising 
from  the  depreciation  of  the  bank-notes.  Taking  away 
payments  in  gold  and  the  shipping-points,  all  normal  limits 
to  fluctuations  in  exchange  are  removed.  Thus  the  ex- 
change may  be  modified  in  price  by  any  of  the  considera- 
tions which  touch  the  credit  of  France  and  the  uncertain- 
ties of  her  trade. 

§  8.  Having  thus  studied  the  organization  of  French 
money  and  credit,  and  followed  its  workings  in  the  very 
diflScult  conditions  during  the  first  three  years  of  the 
war,  we  have  come  to  see  how  the  mechanism    .     „. 

Appalling 

of  private  credit  has  been  closely  related  to  fiscal  problem 
that  of  public   credit   through   the  Bank   of 
France.     We  have  also  seen   what  complications  have 
arisen  from  this  relationship.     If,  in  this  critical  time, 
private  credit  has  known  great  tribulation,  a  fortiori  pub- 


190  CREDIT  OF  THE  NATIONS 

lie  credit  must  have  fared  worse.  Starting  the  war  with 
the  largest  debt  of  any  country  in  the  world,  obliged  to 
borrow  to  meet  extra  expenses  in  1914,  with  instalments 
on  the  bond-issue  yet  unpaid  after  the  war  began/  the 
unprecedented  requirements  of  the  most  expensive  war 
in  all  history  looming  in  gigantic  figures  before  him,  the 
task  of  the  finance  minister  must  have  been  appalling. 
How  France  could  carry  this  burden,  on  what  resources 
of  strength  she  could  draw,  what  fiscal  measures  she  could 
adopt,  are  part  and  parcel  of  that  psychology  and  those 
characteristics  of  the  French  by  which  they  also  met  the 
enemy  in  the  field.  The  fiscal  needs  were  not  those  of  an 
ordinary  emergency. 

In  meeting  the  cost  of  mobilization  and  the  early  enor- 
mous expenses  of  war,  France  signalized  by  her  first  fiscal 
measures  the  general  policy  which  seemed  to  have  been 

forced  upon  her  by  circumstances.  Under  her 
^orrfbaS^      existing  organization  of  credit  the  line  of  least 

resistance,  as  well  as  precedent,  led  her  to 
borrow  from  the  Bank  of  France.  As  we  have  seen,  this 
sort  of  borrowing  was  continued  to  a  dangerous  extreme. 
It  was,  however,  in  accordance  with  the  general  policy  of 
borrowing  by  temporary  and  short-time  obligations  in 
the  expectation  that,  later,  long-term  funding  operations 

>  In  1914,  besides  a  budget  of  $1,075,000,000,  a  3'A  per  cent  loan  of  $170,000,- 
000  was  placed  in  July  to  cover  expenses  in  Morocco,  the  three  years'  military 
service,  and  the  increase  of  the  fleet.  When  the  war  broke  out  the  subscribers 
to  this  loan  found  it  difficult  to  meet  the  unpaid  instalments  coming  due,  one  at 
the  end  of  October  and  another  at  the  end  of  December.  Although  the  two 
instalments  were  changed  to  four,  the  loan  hung  heavy  over  the  market.  They 
were  quoted  at  about  82,  being  held  largely  by  the  coulisse.  This  loan  proved 
a  great  annoyance  in  later  operations.  On  January  26,  1915,  the  government 
agreed  to  accept  payments  already  made  on  this  loan  at  91  (the  price  of  issue) 
in  payment  of  future  loans,  and  arranged  with  the  Bank  of  France  to  lend  to 
subscribers  the  sums  needed  to  meet  coming  instalments.  A  greater  part  was 
converted  into  new  National  Defense  Stock,  running  between  five  and  ten 
years.     By  the  spring  of  1915  all  but  about  $4,400,000  were  paid  off. 


FRENCH  MONEY  AND   CREDIT  191 

might  be  carried  through,  which  would  take  up  the  float- 
ing and  maturing  debt  as  it  fell  due.  The  long-established 
preference  of  European  money  markets  for 
short-term  government  bills  was  relied  upon  buiT^"'^ 
by  the  French  Treasury  to  float  very  large 
sums  of  Bons  du  TrSsor,  in  small  denominations  of  $20, 
$50,  and  $200,  for  perhaps  one  year  at  5  per  cent.  Early 
in  1915  some  $50,000,000  of  these  were  absorbed  by 
London. 

Likewise,  the  Bons  de  la  Defense  Nationale,  running 
usually  from  three  to  six  (but  not  over  twelve)  months, 
at  5  per  cent,  of  small  denominations  (later  purchas- 
able at  post-offices  as  low  as  $4  and  $1), 
appealed  to  small  investors.  Large  amounts  bonds**"" 
were  taken  by  the  credit  houses,  while  the 
coulisse  subscribed  early  for  $100,000,000;  and  the  Bank 
of  France  accepted  them  as  collateral  for  80  per  cent  of 
loans.  By  February,  1917,  the  issue  of  short-term  na- 
tional bonds  was  reported  to  be  $2,900,000,000.  The 
resort  to  temporary  and  short-term  borrowing  is  indicated 
by  the  statement  of  M.  Ribot,  August  5,  1915,  that  by 
then  about  two-fifths  of  the  needs  of  the  Treasury  had 
been  met  by  advances  from  the  Bank  of  France  and  the 
issue  of  notes,  and  three-fifths  by  short-term  treasury 
bonds. 

By  November  15,  1915,  a  long-term  national  loan,  or 
perpetual  rentes,  popularly  known  as  the  "victory  loan," 
at  5  per  cent,  was  issued  at  88,  to  the  amount  of  $3,100,- 
000,000,  callable  in  sixteen  years.  A  second 
long-term  national  loan  of  5  per  cent  rentes  \oans**"° 
was  successfully  placed  by  October,  1916,  to 
the  amount  of  $2,275,000,000. 

By  June,  1917,  the  war  debt  must  have  been  approxi- 
mately as  follows  (in  millions) ; 


192 


CREDIT  OF  THE  NATIONS 


National  Defense  Bonds $2,900 

Other  national  obligations 400 

Long-term  5%  Loan,  November,  1915 3,100 

Long-term  5%  Loan,  October,  1916 2,275 

Advances  by  Bank  of  France 2,120 

Advances  by  Bank  of  Algiers 20 

Loans  in  England 1,185 

Loans  in  United  States 795 

Advances  to  Allies 775 

Other  debt 930 

$14,500 

According  to  the  report  of  the  budget  committee  of 
the  Chamber  of  Deputies,  France  had  spent  on  the  war, 
by  the  middle  of  1917,  $16,600,000,000.     If  the  war  debt 

be  taken  as  about  $14,500,000,000,^  on  which 
tS!  ^^^^  annual  charge  was  $502,000,000,  to  find 

the  total  burden  at  the  end  of  the  third  year^ 
of  the  war,  there  must  be  added  the  pre-war  debt  of 
$6,348,000,000,  with  its  annual  charge  of  over  $200,- 
000,000,    thus   creating   with    other  charges   an    annual 


•  Cf  London  Economist,  December  9,  1916,  p.  1084. 

*  For  a  period  longer  than  that  given  above,  that  is,  including  nine  months 
of  1917  in  the  period  since  the  war  began,  the  Finance  Ministry  gives  the  fol- 
lowing analysis  of  expenditures  (in  millions  of  dollars) : 


Strictly 

military 

ejcpenditure 

Charges 
on  debt 

Social 
expenditure 

Other 
expenses 

Total 

Total,  last  5  months, 
1914 

$1,173 
3,155 

4,734 

4,107 

$12 
.380 
653 

644 

$98 
542 
659 

598 

$33 
486 
480 

453 

$1,318 
4,561 
6.526 

5,802 

Total,  1915 

Total,  1916 

Total,   three-quarters, 
1917 

Total   since   outbreak 
of  war 

$13,169 

$1,689 

$1,897 

$1,452 

$18,207 

In  this  period  the  receipts  from  taxes  and  budget  are  given  as  $2,692,000,000. 
Cj.  London  Economist,  August  4,  1917,  p.  155,  and  September  8,  1917,  p.  357. 


FRENCH  MONEY  AND   CREDIT  193 

burden  of  over  $800,000,000  to  be  raised  by  taxation 
to  pay  the  interest  alone  on  the  public  debt  of  about 
$21,000,000,000.  The  last  peace  budget  in  1914  called  for 
$1,075,000,000. 

To  the  mind  accustomed  to  pre-war  finance  these  fig- 
ures seem  incredible.  What  is  to  be  said  as  to  the 
capacity  of  France  to  carry  this  load — or  a  load  even  in- 
creased by  added  years  of  war  still  to  come.^*  AbUityto 
The  annual  charges  on  the  debt  would  now  carry  the 
absorb    nearly    the    total    revenue    of    1914,  ^  ^°' 

and  even  before  that  year  it  seemed  as  if  taxes  had 
reached  the  limit.  In  this  war,  however,  what  has 
seemed  incredible  has  in  many  instances  Lurned  out  to  be 
possible.  The  thrift  of  the  French  has  long  been  noted. 
Jn  France,  if  in  any  country,  seared  as  it  has  been  by 
losses  of  life  and  property,  the  psychology  of  sacrifice  for 
a  future  gain  will  allow  the  largest  part  of  the  excess  of 
production  over  a  low  margin  of  subsistence  to  be  turned 
over  to  the  state,  either  in  taxes  or  in  subscriptions  to 
funded  debt.  Already  these  subscriptions  have  passed 
all  expectations.  No  one  seems  to  have  realized  how 
large  the  margin  over  subsistence  has  grown  in  these 
latter  years  of  mechanical  development  and  of  the  era  of 
new  power.  It  is  out  of  this  enormous  surplus  that  the 
amazing  extravagance  of  recent  years  has  been  made 
possible;  and,  if  extravagance  ceases,  to  the  same  extent 
can  it  bear  the  waste  of  war,  without  much  impairing 
the  forces  of  production  (except  by  loss  in  changing  to 
war  industries,  loss  of  labor,  etc.). 

The  psychological  shock  caused  by  the  frightful  losses 
of  France,  which  brings  home  the  obligation  of  refrain- 
ing from  unnecessary  consumption — everything  above  the 
minimum  needed  for  health — will  yield  an  incredible  fund 
of  savings.     The  increase  of  savings  even  during  the  war 


194  CREDIT  OF  THE  NATIONS 

has  been  amazing;  although  much  is  hoarded.     So  strong 

is  French  thrift^  that  it  forms  a  basis  for  the  estimates  of 

a  minister  of  finance  when  he  needs  loans.     From  such 

,   ,  .,      sources,  as  well  as  from  the  earnings  of  indus- 

French  thrift.  .      i    ,  .,    .      . 

try  and  trade,  capital  has  grown  until  it  is 
estimated  that  the  invested  capital  of  France,  as  before 
noted,  amounts  to  $22,000,000,000,  of  which  foreign 
securities  owned  by  its  citizens  are  placed  at  $8,000,- 
000,000.  The  income  alone  from  securities  owned  by 
the  French  is  stated  to  be  over  $1,000,000,000.^  In  1911 
the  annual  savings  of  France  were  put  at  $600,000,000, 
of  which  some  $400,000,000  were  available  for  investment 
in  securities.  In  trying  to  find  the  total  fund  from  which 
savings  can  be  made,  we  get  nothing  very  definite.  The 
estimates  of  total  wealth  are  of  doubtful  value;  but  that 
for  France  has  been  given  by  Helff erich  as  $70,000,000,000, 
and  her  total  income  as  $6,000,000,000.  As  the  strength 
of  the  desire  to  save  increases,  an  even  larger  total  of  sav- 
ings may  be  made  out  of  a  lessened  fund  of  wealth.  To 
the  savings  and  investments  of  France  the  Treasury  must 
look  for  the  resources  to  float  its  loans.  If  all  securities 
owned  by  the  French  were  offered  in  exchange  for  the 
debt  of  France,  the  whole  of  that  now  existing  ($21,000,- 
000,000)  could  be  absorbed  at  home.  Or,  if  the  foreign 
securities  owned  in  France  were  sold,  they  would  take  up 
more  than  one-third  of  the  present  enormous  debt.  Or, 
again,  if  one-tenth  of  the  total  annual  income  of  France 
were  saved,  the  whole  debt  now  existing  could  be  taken 
up  in  thirty-seven  years. 

'  In  the  thirty  years,  1875-1905,  in  the  very  period  when  the  burden  of  taxa- 
tion had  been  increased  by  $200,000,000,  the  funds  in  French  savings-banks 
rose  from  $136,000,000  to  $964,000,000. 

*  Yves  Guyot,  loc.  cit.,  p.  7. 


FRENCH  MONEY  AND   CREDIT  195 

As  with  other  countries,  France  can  meet  the  expenses 
of  the  war  either  by  taxation  or  by  loans.  Until  well 
into  1915  she  did  not  try  to  increase  the  already  burden- 
some taxes.     Obviously,  she  must  follow  the    _.      _^ 

•^  _  Proportion  of 

rule  not  to  tax  beyond  the  point  where  the  taxes  to 
productivity  of  industry  would  be  lowered. 
The  case  of  France  has  shown  that  war  levies  may  form 
a  lower  ratio  of  taxes  to  loans  than  in  other  countries. 
There  can  be  no  fixed  percentage  for  all  countries;  for 
internal  conditions  in  each  must  determine  how  much 
taxation  the  people  can  bear,  and  only  experience  can 
furnish  a  guide.  For  France,  her  past  follies  in  public 
expenditure  largely  decided  for  her  the  alternative  of 
large  loans  relatively  to  new  taxation.  Of  the  total  ex- 
penditure to  the  middle  of  1917,  $16,600,000,000,  the 
amount  met  by  taxation,  according  to  M.  Ribot,  is 
$2,429,000,000,  or  14.6  per  cent  (as  against  25.4  per  cent 
for  Great  Britain). 

By  1916  it  became  clear  that  new  taxes  must  be  levied 
sufficient  to  provide  for  the  interest  on  the  new  loans,  and 
serious  changes  were  made  in  the  fiscal  system.  Obvi- 
ously, the  new  sources  to  be  relied  upon  were 
the  taxes  on  incomes  and  war  profits.  A 
graduated  tax  on  incomes  above  $600  was  levied,  rising 
from  1  per  cent  to  10  per  cent  (on  incomes  over  $30,000), 
but  granting  reductions  in  proportion  to  dependents. 
War  profits  above  $100,000  to  pay  60  per  cent;  on  oth- 
ers 50  per  cent.  The  average  profits  of  the  three  years 
before  August,  1914,  were  taken  as  a  basis  for  arriving  at 
war  profits.  Customs  duties  were  also  doubled,  although 
early  in  the  war  import  duties  on  grains  and  meat  were 
suspended.  In  effect,  France  reduced  her  percentage  of 
direct  taxes  from  47  in  1913  to  39  in  1916,  and  increased 


196  CREDIT  OF  THE   NATIONS 

that  of  indirect  taxes  from  52  in  1913  to  60  in  1916.^  In 
spite  of  the  occupation  of  a  part  of  her  territory  by  the 
Germans,  the  revenue  of  France  has  about  held  its  own.^ 
In  estimating  the  abiHty  of  France  to  carry  the  burden 
of  this  gigantic  war  debt,  the  middle  class  and  the  peas- 
ants must  be  kept  in  mind.  The  matter  is  a  psycho- 
logical one.  It  is  a  question  of  the  traits  and 
o/prench  qualities  of  her  people.  If  nearly  all  the  mar- 
peopie  to  be  gjjj  q£  gQods  produccd  by  an  energetic  people 
over  and  above  the  necessaries  of  life  is  saved, 
even  the  prodigious  war  debt  and  the  heavy  taxation 
may  be  successfully  carried.  One  writer^  instances  three 
times  in  the  past  two  centuries  when  France  "has  been 
completely  defeated  and  left  in  a  state  of  seeming  eco- 
nomic exhaustion — at  the  end  of  the  long  campaign  of 
Louis  XIV,  at  the  final  overthrow  of  Napoleon,  and  at 
the  crushing  climax  of  the  Franco-Prussian  conflict.  .  .  . 
Yet,  after  each  of  these  experiences,  the  world  witnessed 
the  extraordinary  spectacle  of  France  promptly  resuming 
her  place  in  the  economic  system,  and  in  the  end  display- 
ing a  tangible  economic  power  even  greater  than  before." 

^  Great  Britain  did  the  opposite :  increased  her  percentage  of  direct  taxes 
from  47  in  1913  to  73  in  1916,  and  reduced  that  of  indirect  taxes  from  52  in  1913 
to  26  in  1916.  Cf.  War  Finance  Primer  (National  Bank  of  Commerce),  by 
E.  R.  A.  Seligman,  R.  R.  McElvare,  and  L.  Gottlieb,  pp.  116-121.  For  the 
pre-war  policy  of  France,  Germany,  and  England,  see  Pierre  Leroy-Beaulieu, 
Les  Impots  et  les  Revenus  en  France,  en  Angleterre  et  en  Allemagne,  Paris,  1914, 
pp. 55-58. 

2  Revenue  of  France  (in  millions) : 

1913 $928 

1914 797 

1915 777 

1916 933 

'  A.  D.  Noyes,  Financial  Chapters  of  the  War,  p.  205. 


CHAPTER  V 

GERMAN  CREDIT  OPERATIONS 

Credit  situation  before  the  war — Financial  preparedness — Accumula- 
tion of  gold — Banking  control — Central  position  of  Reichsbank: 
Its  operations — -Clearing-house — Joint-stock  banks— Darlehnskas- 
sen — Municipal  loan  bureaus— Kriegskredit  banks— Mobilization 
of  credit — Shock  on  the  bourse— Suspension  of  gold  payments — 
Disturbance  to  industry — Moratorium — Operations  of  the  Reichs- 
bank— Expansion  of  the  note-issues — Campaign  for  gold — Incon- 
vertibility— Reduction  of  German  production — Breakdown  of  for- 
eign trade  reduces  basis  of  credit — Inflation  insufficient  cause  of 
rise  of  prices — Fall  in  German  exchange  and  its  causes — Public 
debt — War  loans — Solvency  of  credit — Where  loans  come  from — 
Advantage  of  home  debt — Taxation — Duration  of  war — Recovery 
after  war. 

§  1.  A  study  of  the  workings  of  the  German  organiza- 
tion of  money  and  credit  during  the  first  three  years  of 
the  war  has  a  special  significance  not  only  from  the  point 
of  view  of  the  student  of  money  and  credit,  but  also  from 
the  point  of  view  of  the  revelations  it  brings  as  to  the 
preparations  for  a  war  obviously  foreordained  by  the 
rulers  of  Germany, 

The  characteristic  concept  of  the  state  which  has  given 
political  thinking  in  Germany  a  distinctive  quality,  has 
also  left  its  mark  on  the  theories  of  money  and  the  sys- 
tem of  credit.  It  was  certainly  an  amazing 
political  power  which  could  so  thoroughly  ^1^3(^16°^ 
impregnate  all  forms  of  doctrine,  assumptions       affect 

»    ,  1  1  ,  .  »  •  theories  cf 

of  thought,  premises  01  reasonmg,  even  un-       money, 
conscious  prejudices  and  preconceptions,  with 
the  belief  in  the  state  as  supreme  over  all  the  interests  of 
the  individual,  and  even  in  the  expediency  of  granting 

197 


198  CREDIT  OF  THE   NATIONS 

to  the  autocratic  refiresentatives  of  the  state  practically 
unlimited  powers  for  the  regulation  of  private  industry 
and  social  life.  Even  academic  thinking  finds  its  reward 
in  preparing  the  measures  for  carrying  out  an  a  priori 
conclusion  which  conforms  to  the  governmental  policy. 
That  the  government  knows  best  what  the  student  of 
money  and  credit  should  believe  is  only  part  and  parcel 
of  the  general  intent  to  subordinate  all  activities,  physical 
or  mental — even  at  the  sacrifice  of  what  is  regarded  by 
us  as  the  moral  element — to  the  success  of  a  measure 
stamped  with  the  authority  of  the  imperial  will.  It  is, 
therefore,  not  strange  that  there  developed  a  theory  that 
the  value  of  money  depended  entirely  upon  the  legal 
action  of  the  state, ^  and  that  not  only  the  currency  but 
the  whole  credit  organization  was  made  subservient  to 
the  policy  of  the  government.  In  one  way  or  another 
banking  operations  were  placed  under  the  imperial  con- 
trol. It  will  therefore  be  interesting  to  watch  how  such 
theories  of  money  and  such  governmental  interference 
with  credit  worked  under  the  storm  and  stress  of  an 
emergency  whose  gravity  could  not  have  been  foreseen 
even  by  the  Germans  themselves. 

In  one  respect,  however,  the  credit  situation  in  Ger- 
many immediately  before  the  war  discloses  a  marked  dif- 
ference from  that  in  England,  France,  or  in  any  of  the 
Allied  nations.     In  other  than  the  Teutonic 

War  no 

surprise  to  couutries  the  war,  wlicn  it  actually  broke  out, 
ermany.  came  as  a  surprise  followed  by  a  stunning  shock 
to  credit.  Not  so  in  Germany.  So  far  as  was  possible, 
everything  was  foreseen.  Meticulous  in  every  detail 
as  was  the  preparedness  for  naval  and  military  possi- 
bilities, it  was  equally  apparent  in  monetary  and  financial 
anticipations.     Indeed,  so  obvious  were  the  prearrange- 

■  Cf.  G.  F.  Knapp,  Staatliche  Theorie  des  Geldes,  Leipzig,  1905,  pp.  x  +  398. 


GERMAN  CREDIT  OPERATIONS  199 

ments  for  the  expansion  of  money  and  credit  that  they 
give  convincing  testimony  as  to  the  intention  to  be  ready 
for  war  at  the  very  minute  agreed  upon  by  the  General 
Staff.  There  can  be  no  doubt  that  leaders  in  German 
banking  knew  that  war  was  foreordained  and  were  advised 
to  put  their  houses  in  readiness  months  before  hostihties 
actually  began.  The  world  of  credit  has  something  to 
say  as  to  the  ones  responsible  for  bringing  on  the  most 
unnecessary  as  well  as  the  most  murderous  war  of  all 
time. 

It  seems  clear  that  the  German  policy  of  aggression 
had  aimed  at  bringing  on  the  war  earlier,  but  had  been 
held  up  not  only  by  Italy  in  1913,  but  by  the  difficult 
economic   and   banking   conditions   of   recent     _    . 

°  _  ^  Business 

years.  In  effect  the  military  party,  not  the  interest 
financial  interests,  controlled  the  decision.  *^^'°^  ^"" 
The  so-called  "moneyed  class"  had  everything  to  lose 
and  nothing  to  gain  by  going  to  war — as  subsequent  de- 
struction of  wealth,  confiscation  in  the  name  of  necessity, 
progressive  taxes  on  income  and  war  profits,  and  forced 
loans  have  made  patent.  It  was  the  lust  for  power  and 
expansion,  the  vision  of  Mitteleuropa,  which  triumphed 
over  the  natural  interests  of  industry  and  commerce, 
whose  instinctive  promptings  were  for  peace.  It  was 
absolutism,  not  capitalism,  which  brought  unnumbered 
woes  on  the  proletariat  and  made  of  them  Kanonenf utter. 
Under  a  form  of  government  where  they  can  make  them- 
selves felt,  business  interests  have  frequently  kept  ambi- 
tious politicians  from  going  to  war. 

Since  the  Balkan  wars  the  condition  of  credit  in  Europe 
(and  in  America  as  well)  had  been  disturbed.  Germany 
had  never  accumulated  so  much  capital  as  France  or  Great 
Britain,  and  in  her  recent  industrial  expansion  she  had  so 
far  overdrawn  on  her  domestic  funds  that  she  had  been 


200  CREDIT  OF  THE  NATIONS 

forced  to  borrow  from  other  countries,  even  from  the 
United  States.  Her  credit  resources  were  strained.  It 
was  this  weak  condition  of  her  credit  that  forced  Ger- 

many,  when  French  bankers  began  to  with- 
German  draw  their  deposits  from  German  banks  in  the 

Moroccan  compHcations  of  1911,  to  lower 
her  demands,  if  war  was  to  be  avoided.^  The  uneasiness 
of  investors  since  1905  and  during  the  two  Balkan  wars, 
and  the  consequent  uncertainty  in  money  markets,  was 
due  to  a  realization  by  dealers  in  international  credit  that 
the  possibility  of  a  general  European  war  depended  on 
the  course  of  events  in  the  Balkans  and  how  they  affected 
Germany's  plan  for  extending  her  control  over  the  route 
to  the  Persian  Gulf.  Wliile  England  and  France  had 
warning  enough  of  Germany's  obvious  preparedness,  but 
had  never  been  willing  to  admit  the  lengths  to  which 
Germany  was  ready  to  go,  German  financiers  were  fully 
alive  to  what  was  impending,  and  acted  accordingly.  In 
well-informed  centres  of  credit  there  could  be  little  doubt 
that  Germany  was  ready  to  risk  even  a  general  European 
war  by  supporting  Austria-Hungary  against  Russia  and 
the  Slavic  elements  which  obstructed  the  way  to  Con- 
stantinople. The  only  hope  of  preventing  war  was  the 
yielding  of  Russia  to  Austria — a  submission  to  the  plans 
of  Germany  working  through  Austria  and  Turkey.  We  all 
know  now  what  happened  when  Russia  refused  to  yield. 
Using  the  conflict  with  France  over  Morocco  as  a 
means  of  obtaining  additional  credits,  large  increases 
were  made  in  the  artillery,  cavalry,  and  aviation  branches 

of  the  army  in  1912.     But  the  formation  of 

Non-recur-  "^ 

ring  tax  the  Balkan  League  and  the  knockout  blow  it 

^^^^'  gave  to  Turkey  were  directly  responsible  for 

the  defense  bill  introduced  in  April,  1913,  which  added 

'  Cf.  supra,  p.  154. 


I 


I 


GERMAN  CREDIT  OPERATIONS         201 

some  136,000  men  to  the  army  and  the  collection  of  an 
immense  amount  of  material.^  This  heavy  expenditure 
was  made  possible  by  the  Wehrbeitrag,  a  special,  non- 
recurring tax,  intended  to  raise  $250,000,000  on  incomes 
and  real  property.  The  tax  on  the  latter  began  with 
0.15  per  cent  on  property  above  $2,500,  and  rose  by  de- 
grees to  1.5  per  cent  on  that  above  $1,250,000.  The 
income  tax  started  with  1  per  cent  on  incomes  over 
$1,250,  increasing  to  8  per  cent  on  incomes  over  $125,000, 
The  assessments,  under  the  non-recurring  feature  of  the 
law,  were  to  be  met  in  three  instalments,  payable  in  1914, 
1915,  and  1916.  From  the  first  instalment  the  imperial 
Treasury  received  about  $75,000,000  in  the  spring  of  1914. 
The  remaining  payments  disappear — like  an  underground 
river — under  the  cover  of  the  enormous  war  finances. 
With  this  and  other  taxes,  in  all,  over  and  above  ordinary 
levies  in  the  budget,  a  total  of  new  taxation  amounting 
to  about  $437,000,000  was  imposed  in  the  three  years 
before  the  war. 

If  the  imposition  of  the  Wehrbeitrag  were  not  a  sufficient 
rattling  of  the  sabre,  financial  Europe  should  have  known 
of  German  preparedness  through  the  attempts  of  Berlin 
to  collect  gold.  It  was  well  known  in  Vienna 
that  for  eighteen  months  before  the  war  Ger-  accumulation 
many  was  persistently  gathering  in  gold.  The  °  ^° 
purchase  of  foreign  exchange  in  order  to  control  the  move- 
ment of  balances  in  gold  is  carried  on  to  a  nicety  in  Eu- 
rope.- It  was  the  beginning  of  a  well-thought-out  scheme 
to  apply  the  psychology  of  large  gold  resources  to  the  sup- 
port of  her  credit  organization.     There  was  recognition  of 

1  Cf.  R.  H.  Fife,  Jr.,  The  German  Empire  Between  Two  Wars  (1916),  pp.  11-12, 
36-37.  See  also  M.  Chase  Going,  "German  War  Finance,"  Journal  of  Political 
Economy,  June,  1916,  p.  515. 

-  In  1907  the  Reichsbank  bought  gold  bills  amounting  to  268,100,000  marks; 
but  in  1913,  832,500,000  marks. 


202  CREDIT  OF   THE  NATIONS 

the  general  belief  that  a  great  store  of  gold  would  create 
confidence  in  the  stability  of  her  currency  system.  Even 
though  it  was  already  predetermined  to  give  up  redemp- 
tion in  gold,  nevertheless  there  must  have  been  reliance 
on  the  efficacy  of  the  mere  possession  of  gold,  even  if  it 
were  kept  as  a  national  hoard,  to  maintain  confidence. 
After  all,  the  mere  possibility  of  redemption  arising  out 
of  the  existence  of  gold  reserves  has  always  had  some 
supporting  influence  on  the  value  of  even  inconvertible 
paper.  Nevertheless,  this  acknowledgment  of  the  effect 
of  a  popular  conviction — call  it  prejudice,  if  you  will — of 
the  effect  of  gold  redemption  (although  not  immediate) 
on  the  value  of  paper  money  goes  counter  to  the  theory 
that  the  state  can  regulate  its  value  by  law.  If  the  power 
of  the  state  is  paramount,  why  depend  on  possible  re- 
demption? But  in  the  field  of  money  and  credit,  as  in 
no  other  sphere  of  thinking,  one  cannot  expect  to  find 
consistency,  least  of  all  among  public  men. 

The  high  regard  for  the  eflScacy  of  gold  to  be  kept  as  a 
"war  chest,"  although  rather  mediaeval  and  contrary  to 
modern  ideas  of  keeping  money  at  work  in  productive 
uses,  has  held  sway  in  many  countries,  and 
persisted  in  Germany,  in  spite  of  many  doubts 
as  to  its  existence,  in  the  imperial  war  treasure  supposed 
to  have  been  kept  in  the  Julius  Tower  at  Spandau. 
Wherever  it  was  kept,  there  is  now  no  doubt  as  to  its 
existence,  nor  that  it  was  a  part  of  the  old  Prussian  tra- 
ditions. When  the  German  Empire  was  founded,  Prussia 
turned  in  her  war  chest  of  accumulated  coin  to  the  im- 
perial Treasury.  Moreover,  $30,000,000  in  gold  coin  had 
been  taken  from  the  French  indemnity  of  war  and  added 
to  the  war  chest  at  Spandau.  This  fund  was  under  the 
management  of  the  chancellor  and  the  imperial  debt 
commission,  to  be  used,  with  the  consent  of  the  Reichs- 


GERMAN   CREDIT  OPERATIONS  203 

tag,  only  for  mobilization.^  In  addition,  by  the  Act  of 
July  3,  1913,  the  war  chest  was  to  be  doubled  by  the  sale 
of  imperial  treasury  notes  for  gold.  Before  the  war 
broke  out  some  $21,000,000  in  gold  had  been  obtained 
under  this  Act,  partly  by  direct  importation  and  partly 
out  of  the  circulation,  so  that  the  war  chest  amounted 
to  about  $51,000,000  in  July,  1914. 

The  retention  of  gold  was  to  be  furthered  by  measures 
tending  to  increase  the  control  of  the  Reichsbank  over 
gold,  such  as  the  Act  of  1906,  permitting  the  issue  of 
Reichsbank  notes  in  denominations  of  50  and 
20  marks  (the  lowest  note  previously  having  fo^d*'"' "^^'^ 
been  100  marks),  issued  by  any  branch,  but 
redeemable  only  at  the  head  office  in  Berlin.  The  object 
was  to  encourage  the  use  of  notes  instead  of  coin.  More- 
over, in  1909  the  bank-notes  were  made  a  full  legal  ten- 
der. Also,  imperial  treasury  notes  {Reichshassenscheine) 
were  issued  in  denominations  of  10  and  5  marks.  In  1913 
these  treasury  notes  were  increased  from  120,000,000  to 
240,000,000  marks.  Inasmuch  as  they  were  a  legal  ten- 
der and  counted  as  lawful  cash  in  the  one-third  cover 
held  by  the  Reichsbank  against  its  notes,  the  effect  of 
this  enlargement  of  treasury  notes  meant  a  possible  in- 
crease of  360,000,000  marks  of  bank-notes,  without  a 
technical  violation  of  the  law  as  to  reserves.  In  July, 
1913,  also,  the  chancellor  was  authorized  to  coin  $30,- 
000,000  in  silver.  These  laws  were  a  part  of  the  prep- 
aration for  war  and  for  the  foreordained  time  when  the 
paper  might  be  irredeemable.  As  a  consequence,  the 
gold  stock  of  the  Reichsbank  rose  from  $258,000,000  in 
July,  1911,  to  $339,000,000  in  July,  1914. 

Yet  it  seems  to  have  been  accepted  by  financial  authori- 

'  C/.  M.  Chase  Going,  he.  cit.,  p.  515.     I  have  freely  drawn  on  this  writer 
for  many  facts  in  this  chapter. 


204  CREDIT  OF  THE   NATIONS 

ties  that  the  coming  war  should  be  carried  through  with 
an  inconvertible  paper.  This  surprising  and  dangerous 
conclusion  was  not,  of  course,  based  on  any  precedent 
of  the  Franco-Prussian  War,  because  at  that  time  no 
Reichsbank,  no  German  Empire,  existed.  It  may,  how- 
ever, have  been  suggested  by  the  experience  of  France 
in  and  after  that  war,  when  specie  payments  were  sus- 
pended and  the  notes  of  the  Bank  of  France  saved  from 
any  serious  depreciation  during  inconvertibility.  But  the 
difficulty  of  France  at  that  time  was  a  very  different  one 
from  this  into  which  Germany  was  about  to  plunge. 
Perhaps  the  only  explanation,  after  all,  was  a  conviction 
of  German  invincibility  and  that  the  war  would  be  very 
brief.  The  test  of  this  questionable  theory  of  money, 
however,  was  soon  likely  to  prove  very  disquieting. 

The  government,  also,  was,  through  the  Reichsbank, 
strengthening  its  hold  upon  the  joint-stock  banks.  With 
the  development  of  industry  and  the  growth  of  wealth  in 
c  tr  1  b  Germany  they  had  been  waxing  rich  and  be- 
Reichsbank  coming  more  and  more  independent  of  the 
Reichsbank.  Such  a  tendency  the  autocracy 
set  out  to  counteract.  The  banks  were  obliged,  in  1906, 
to  publish  their  accounts  every  two  months.  Also,  effec- 
tive pressure  was  brought  to  bear  upon  the  banks  to  keep 
larger  deposits  with  the  Reichsbank.  In  the  dubious 
days  of  1907,  the  Moroccan  crisis  of  1905-1911,  and  the 
Balkan  wars,  it  was  found  that  the  joint-stock  banks  had 
locked  up  their  capital  in  the  stocks  of  industrial  con- 
cerns or  in  three  months'  paper  which  had  to  be  renewed.^ 
If  war  came,  and  the  bourses  were  closed,  their  stocks 
could  not  be  sold;  they  could  not  call  in  their  loans  with- 
out ruining  their  customers;  nor  could  they  expect  re- 

'  C/.   A.  Loveday,   "German  War  Finance   in   1914,"   Economic  Journal, 
March,  1916,  pp.  44-56. 


GERMAN  CREDIT  OPERATIONS  205 

discounts  from  the  Reichsbank  on  paper  which  could  not 
be  hquidated  at  its  maturity.  The  danger,  in  truth, 
came  from  assets  based  on  ventures  not  of  a  sort  to  be 
undertaken  by  commercial  banks  creating  demand  liabili- 
ties: the  confusion  of  investment  and  speculation  with 
legitimate  banking. 

Preparations  of  this  sort  were  parts  of  a  carefully 
worked-out  plan  intended  to  anticipate  every  possibility 
of  the  crisis  in  credit  which  might  be  expected  when  the 
coming  war  broke  out.^  It  was  intended  to  supply  credit 
to  all  classes  of  the  people  for  all  the  necessities  which 
might  arise  in  the  emergencies  due  to  the  sudden  shock  of 
war.  Through  what  agencies  these  purposes  were  actu- 
ally carried  out  we  shall  soon  learn. 

§  2.  The  cluster  of  institutions  which  make  up  the 
credit  organization  of  Germany  are,  of  course,  very  simi- 
lar to  those  in  other  European  countries,  and  yet  they 
have  a  flavor  quite  characteristic  of  the  German  soil  in 
which  they  have  grown.  Being  of  Prussian  origin  and 
shaped  by  the  imperialistic  influences  which  established 
the  empire  at  the  close  of  the  Franco-Prussian  War,  it 
was  to  be  expected  that  governmental  control  would  be 
strongly  in  evidence. 

The  central  Reichsbank,  which  has  dominated  the  credit 
system  since  its  creation  in  1875,  the  whole  of  whose  capi- 
tal is  provided  by  private  persons,  was  in- 
tended to  be  the  means  by  which  all  other      under 
agencies  of  credit  were  to  be  made  subject  to      ^^^"1^ 
the  will  and  policy  of  the  Kaiser  through  his 
chancellor.     Remembering  that  in  the  political  life  of  the 

^  So  definitely  were  coming  events  heralded  that  writers  early  gave  their  atten- 
tion to  prevision  of  the  problem.  Cf.  Karl  Helfferich,  Das  Geld  im  russisch- 
japaniacken  Kriege  (1906);  Jacob  Riesser,  Finanzielle  Kriegsbereitschaft  und 
Kriegsfukrung  (1913). 


206  CREDIT  OF  THE  NATIONS 

empire  the  Bundesrat,  or  federal  council,  controlled  by 
the  princes  and  the  nobility,  is  the  centre  of  power,  while 
the  parliament  (Reichstag)  is  not  only  limited  in  power 
but  in  its  franchise,  which  aims  to  keep  the  majority  in 
the  hands  of  the  ruling  class,  we  note  that  the  Curaio- 
rium,  or  body  of  supreme  control  over  the  Bank,  has  for 
its  chairman  the  chancellor  of  the  empire,  the  personal 
appointee  of  the  Kaiser,  The  second  member,  usually 
the  Prussian  minister  of  finance,  is  also  appointed  by  the 
Kaiser,  and  the  three  others  by  the  Bundesrat  out  of  its 
own  membership.  The  chancellor  has  practically  un- 
limited power.  On  one  occasion  he  forbade  the  bank  to 
accept  Russian  securities  as  collateral.  Thus  the  bank- 
ing, may  be  made  subject  to  the  political,  policy. 

The  actual  management  of  the  bank  is  in  the  Direk- 
torium  of  nine  members  (a  president,  vice-president,  and 
directors),  who  are  appointed  for  life  by  the  Kaiser  on 
the  recommendation  of  the  Bundesrat.  The  stockholders 
are  permitted  to  select  a  body  of  fifteen  members  (the 
Central-Ausschuss) ,  who  may  give  advice  to  the  manage- 
ment through  a  committee.  Thus  the  Reichsbank,  al- 
though supposed  to  have  been  modelled  after  the  Bank  of 
England,  is  not,  as  is  the  latter,  an  independent  bank  in 
the  selection  of  whose  officers  the  government  has  no  vote. 

Inasmuch  as  credit  operations  in  Germany  are  carried 
through,  at  least  until  partly  modified  by  recent  agitation, 
mainly  by  the  issue  of  bank-notes,  the  expansion  of  busi- 
ness and  credit  is  necessarily  accompanied  by 
of  credit  an  increase  of  the  note-issues.     The  control  of 

through  ^jjg  situation,  therefore,  implied  a  concentra- 

bank-notes.  ,  ... 

tion,  sooner  or  later,  of  the  exclusive  right  of  is- 
suing bank-notes  in  the  Reichsbank.^     These  notes  are  to 

'  Of  the  original  thirty- two  independent  banks  of  issue  in  1875,  only  four  now 
continue  to  put  out  notes:  Bayerische  Notenbank  at  Munich,  Sachische  Bank 


GERMAN  CREDIT  OPERATIONS         207 

be  covered  to  one-third  of  their  amount  by  lawful  German 
money,  imperial  treasury  notes,  gold  in  bars  or  foreign  coin 
(1,392  marks  to  the  pound  fine);  and  the  remaining  two- 
thirds  by  discounted  paper  having  not  more  than  three 
months  to  run  (Lombards,  or  loans  on  securities,  not  be- 
ing allowed  as  cover  for  the  notes).  As  an  improvement 
on  the  rigid  system  of  the  Bank  of  England,  no  limit  was 
set  for  the  maximum  issues;  but  if  the  notes  should  exceed 
the  one-third  cash  cover,  a  certain  contingent  of  notes 
(550,000,000  marks,  and  at  the  end  of  the  quar-      „    . 

^         .  ^  Kontingent. 

ters  m  March,  June,  September,  and  Decem- 
ber, when  currency  was  in  special  demand  750,000,000) 
were  allowed  without  tax;  but  an  excess  over  this  contin- 
gent would  be  taxed  at  the  rate  of  5  per  cent  per  annum.^ 
In  this  way  a  certain  check  was  imposed  on  the  issue  of 
uncovered  notes;  but  this  limit  could  be  passed  if  the  need 
were  great  enough  to  warrant  the  tax.  That  is,  the  taxa- 
tion of  notes  beyond  the  contingent  was  a  method  of  in- 
troducing flexibility  into  the  circulation,  yet  working 
under  a  brake  to  prevent  excessive  issues.  On  the  other 
hand,  the  requirement  of  a  one-third  cash  cover  was  in- 
flexible, and  set  a  definite  limit  on  the  notes  outstanding, 
forbidding  an  increase  of  notes  unless  accompanied  by 
the  due  proportion  of  cash.  These  two  provisions,  differ- 
ent in  their  operation,  have  the  same  general  purpose. 
As  the  uncovered  issues  expand  under  the  demands  of 

at  Dresden,  Badische  Bank  at  Mannheim,  and  the  Wiirtembergische  Notenbank 
at  Stuttgart,  whose  total  circulation  is  only  about  $35,000,000.  Cf.  Na- 
tional Monetary  Commission,  No.  408,  p.  388. 

•  To  arrive  at  the  basis  for  the  tax,  add  together  the  specie,  gold,  silver,  cop- 
per, and  nickel  coin*;  the  imperial  treasury  notes;  the  Kontingent,  and  the 
notes  of  other  banks  held  by  the  bank.  Then  subtract  the  sum  from  the  total 
note-issues.  Inasmuch  as  a  withdrawal  of  the  issues  of  other  banks  allows  the 
Reichsbank  to  enlarge  its  issues  in  principle,  it  may  increase  the  amount  of  its 
untaxed  notes  by  the  amount  of  the  notes  of  other  banks  in  its  possession.  The 
notes  of  other  banks  were  not  included  in  the  one-third  cash  cover. 


208  CREDIT  OF  THE  NATIONS 

business,  the  cash  reserve  must  change.  Since  the  need 
for  credit  and  notes  fluctuates  with  economic  conditions 
in  the  empire,  it  is  the  uncovered  issues  which  give  the 
desired  flexibihty.  It  may  happen  in  a  period  of  prosper- 
ity that  the  uncovered  issues  are  expanding  at 
oflssu^s^  the  same  time  that  there  is  a  demand  on  the 
Reichsbank  for  gold  needed  for  small  payments 
to  satisfy  increasing  transactions.  Thus  the  highest 
and  lowest  volume  of  the  notes  may  vary  by  a  contin- 
gent of  $137,000,000  to  $187,000,000,  but  it  must  yet  con- 
form to  the  requirement  of  one-third  cash  cover.  Neither 
the  cash  nor  the  commercial  paper,  however,  is  set  aside 
as  a  special  part  of  the  assets  pledged  to  the  redemption 
of  the  notes,  so  that  the  note-holders  have  no  prior  lien 
upon  the  assets  in  preference  to  other  creditors.  Hence 
the  credit  of  the  notes  depends  entirely  upon  their  con- 
vertibility^ into  coin.  The  proportion  of  cash  to  the  notes 
has  usually  been  about  70  per  cent,  falling  to  about  40 
per  cent  in  August,  1914.  Obviously,  the  character  and 
convertibility  of  the  German  currency  rests  entirely  upon 
the  coin  holdings  of  the  Reichsbank.  If  the  notes  of  this 
Bank  depreciate,  the  standard  of  all  German  prices  and 
contracts  depreciates.  Thus,  it  is  one  function  of  the 
Reichsbank  to  control  the  supply  of  money  in  the  empire, 
and  by  its  power  over  the  gold  supply  to  maintain  its 
credit  at  home  and  abroad. 

Its  chief  function,  however,  is  to  discount,  mainly  for 
other  banks,  accepted  bills  of  solvent  persons,  or  com- 
panies, having  not  over  three  months  to  run  and  bearing 
at  least  two,  and  usually  three,  good  names.  Since  loans 
are  sought  from  the  Reichsbank  chiefly  to  replenish  the 
reserves  of  other  banks,  or  to  convert  short-time  paper 
into  cash,  it  is  obvious  that  an  increase  of  loans  is  di- 

•  C/.  Dunbar,  Theory  and  History  of  Banking,  second  edition  (1907),  p.  236, 


GERMAN   CREDIT  OPERATIONS  209 

rectly  followed  by  an  increase  of  that  demand  liability 
which  German  usage  requires — namely,  bank-notes. 
With  us  loans  are  followed  by  deposits  (on  which  checks 
are  drawn) ;  but  the  German  public  make  very 
little  use  of  checks.  The  system  of  lending  on  operations 
collateral  (Lombards),  such  as  securities,  pre-  Rekhsbank 
cious  metals,  merchandise,  and  the  like,^  on 
which  a  higher  rate  of  discount  is  exacted  than  for  short- 
time  commercial  paper,  is  a  part  of  the  demand  for  credit 
and  notes.  The  deposit  item  at  the  Reichsbank  is  built 
up  largely  of  funds  to  support  the  system  of  transfers. 
The  volume  of  notes,  therefore,  is  closely  related  to  the 
demand  for  loans,  and  fluctuates  with  it.  The  Bank  is 
the  central  source  of  both  money  and  credit.^  The  method 
of  taxing  notes  is  not  alone  sufficient  to  regulate  their 
volume,  which  is  so  directly  related  to  the  demand  for 
credit  and  to  the  condition  of  the  money  market.  Con- 
sequently, the  rate  of  discount  is  used,  as  by  other  great 
banks,  to  check  the  increase  of  credit  and  the  issue  of 
notes,  as  well  as  to  attract  the  flow  of  gold.  It  is  to  be 
said,  in  this  connection,  that  the  German  insistence  on 
settling  transactions  by  money,  rather  than  by  credit 
devices  (such  as  our  deposit-currency),  is  not  economical, 
and  hence  an  increase  of  industrial  activity  demands  that 
more  than  is  necessary  must  be  invested  in  the  mechan- 
ism of  exchange. 

^  Lombard  loans  are  made  on  gold  and  silver;  government  and  municipal 
issues,  stocks  and  bonds  of  German  railways;  securities  of  foreign  governments, 
and  foreign  railway  obligations  if  guaranteed  by  the  state;  satisfactory  bills 
receivable;  bonds  of  mortgage  companies  (not  real-estate  mortgages);  and 
merchandise  within  the  empire. 

-  In  view  of  the  suspension  of  specie  payments  in  this  war,  and  the  depre- 
ciation of  the  notes,  the  following  statement  on  the  twenty-fifth  anniversary 
of  the  bank  in  1900  is  significant:  "The  notes  issued  by  the  bank  form  so  large 
a  part  of  the  total  German  currency  that  a  refusal  to  redeem  them  for  sterling 
money  and  the  consequent  depreciation  of  the  notes  would  bring  about  a  col- 
lapse of  the  German  monetary  system."  Nat.  Mon.  Com.,  No.  408,  p.  202. 
Are  we  to  conclude,  in  1917,  that  the  German  monetary  system  has  collapsed  ? 


210  CREDIT  OF  THE  NATIONS 

It  might  be  urged,  on  the  other  hand,  that  the  use  of 
actual  money  is  economized  by  the  system  of  transfers 
(Giroverkehr) ,  so  as  to  accompHsh  all  that  is  obtained  by 

a  deposit-currency  and  a  system  of  clearings. 

To  those  having  deposit  accounts  at  the 
Reichsbank  transfers  without  charge  are  made  (by  red 
check)  from  one  person  or  locality  to  another  through  the 
500  branches.  Indeed,  balances  are  kept  by  other  banks 
at  the  Reichsbank  almost  entirely  to  allow  of  transfers.^ 
By  1900  the  total  transfer  transactions  amounted  to 
about  $40,000,000,000.  To  such  an  extent  was  the  use 
of  money  economized.  Apart  from  such  a  service,  the 
system  of  transfers  is  highly  regarded,  not  only  because 
the  balances  kept  to  support  transfers  increase  the  dis- 
posable funds  of  the  bank,  but  also  because  it  helps  to 
place  the  bank  in  a  position  to  dominate  and  control  the 
money  market. 

So  long  as  payments  are  made  by  persons,  or  banks, 
through  one  central  bank,  the  system  of  transfers  would 
serve  the  purpose  of  a  clearing-house.     But  if  there  are 

several  great  institutions,  each  with  a  large 
of  clearing-  clientele,  then  many  claims  against  other 
house  and       banks  come  into  the  hands  of  some  one  bank; 

checks. 

so  that  a  clearing-house  is  an  imperative  need 
for  offsetting  claims  between  a  number  of  banks  and 
avoiding  the  wasteful  transfer  of  actual  money.  In  Ger- 
many the  payment  of  claims  between  banks  is  carried  on 
through  the  transfer  system  of  the  Reichsbank,  and  thus 
there  is  little  chance  to  induce  the  public  to  substitute 

'  The  Deutsche  Bank  reports  a  practical  illustration  as  follows:  "  Our  branch 
in  Bremen,  for  instance,  wants  money  when  cotton  shipments  start,  and  the 
money  is  transferred  to  them.  The  importers  in  Bremen  sell  the  cotton  to  the 
large  manufacturers.  When  they  get  the  money  it  comes  back  to  us.  The 
Reichsbank,  in  the  transfer  of  funds,  merely  acts  as  intermediary  for  the  other 
banks  who  do  the  business."     National  Monetary  Commission,  No.  405,  p.  386. 


i 


GERMAN  CREDIT  OPERATIONS         211 

checks  for  cash  payments.^  In  Hamburg  the  check  sys- 
tem has  obtained  a  good  foothold.  In  1906  an  Act  was 
passed  legalizing  the  status  of  the  check;  but  even  then 
the  debtor  still  makes  payment  for  large  sums  by  an 
order  on  his  bank  in  a  letter  of  instructions  to  transfer 
the  amount  to  the  bank  of  the  creditor;  while  cash  is  used 
in  the  settlement  for  small  personal  accounts.  Instead 
of  using  checks,  as  with  us,  to  pay  the  tailor,  it  is  the 
practice  to  use  the  transfer  system.  Nevertheless,  in 
1883  the  Reichsbank  had  established  a  system  of  clear- 
ing offices  which  are  now  ten  in  number.^  The  repre- 
sentatives of  the  member  banks  meet  once  a  day  under 
the  leadership  of  the  Reichsbank  at  a  clearing-house  (in 
Berlin,  at  the  Reichsbank)  at  a  fixed  hour  to  exchange 
claims;  items  are  then  taken  back  and  examined  at  each 
bank,  and  at  a  second  meeting  debits  and  credits  are 
ascertained.  Each  creditor  first  clears  directly  with  his 
debtor;  then  final  balances  are  settled,  not  by  cash,  but 
by  the  transfer  system  through  the  Reichsbank  (which  is 
also  a  creditor  and  debtor  at  all  clearing-houses) .  Checks 
are  not  likely  to  supersede  the  transfer  system  be- 
tween different  places.^  Thus,  the  transfer  system 
and  clearing-houses  together  aim  to  serve  the  purpose 
of  the  deposit-currency  in  England  and  the  United 
States. 

Under  the  aegis  of  the  Reichsbank  flourish  421  Joint- 

^  One  main  reason  why  the  general  public  are  indiflFerent  to  the  introduction 
of  checks  is  the  efficiency  and  convenience  of  the  German  money-order  system. 
The  letter-carrier  receives  the  money  and  gives  a  receipt  for  it;  at  the  post- 
office  he  makes  out  and  mails  the  order  to  the  place  desired;  there  the  payee 
receives  from  his  letter-carrier  the  money  at  his  o^ti  door. 

^  In  1900  at  Berlin,  Frankfort,  Stuttgart,  Cologne,  Leipzig,  Dresden,  Ham- 
burg, Breslau,  Bremen,  and  Elberfeld.     Others  have  been  established  since. 

3  In  1900  clearings  amounted  to  about  $7,500,000,000,  while  the  combined 
transfers  and  clearings  were  about  $4.8,000,000,000.  A  business  of  $34,000,- 
000,000  was  transacted  without  the  use  of  specie  by  book  entries  and  transfers. 
Cf.  National  Monetary  Commission,  No.  408,  p.  288. 


212  CREDIT  OF  THE   NATIONS 

stock  banks,  with  a  capital  (in  1907)  of  $880,000,000, 
with  deposits  and  current  accounts  of  $2,444,000,000, 
Fun  ti  f  which  furnish  credit  to  the  general  pubHc. 
large  joint-  Of  these,  six  have  a  capital  of  $311,000,000.^ 
Even  more  than  in  France  these  large  private 
institutions  do  not  confine  themselves  strictly  to  com- 
mercial banking,  but  venture  widely  into  the  underwrit- 
ing of  purely  business  enterprises,  at  home  and  abroad, 
such  as  electric  and  water-power  systems,  the  building  of 
electric  and  steam  railways  in  Russia,  Asia  Minor,  and 
South  America,  or  join  in  the  expansion  of  German  foreign 
trade  under  the  intimate  direction  and  aid  of  the  govern- 
ment in  all  parts  of  the  world.  Such  banks  gave  credits 
to  the  United  States  on  shipments  of  cotton,  copper,  or 
wheat,  and  accepted  long  bills  drawn  on  them  by  the 
shippers;  similar  operations  went  on  with  Austria,  India, 
or  Russia;  and  they  have  had  large  dealings  with  London 
on  shipments  of  merchandise.  In  the  foreign  field  the 
Deutsche  Bank  covers  Turkey,  while  the  Dresdner  Bank 
is  occupied  with  the  transactions  of  the  Krupps.  In  gen- 
eral these  banks  feel  a  responsibility  for  fostering  Ger- 
man industries  and  for  aiding  private  and  public  schemes 
for  the  development  of  the  empire.  Consequently,  they 
must  have  many  assets  which  could  not  be  easily  liqui- 
dated in  times  of  serious  international  complications. 
Usually  they  carry  very  small  reserves,  perhaps  from 
2  to  10  per  cent,  relying  on  rediscounts  at  the  Reichsbank 
whenever  in  need  of  cash.  A  supply  of  short-time  com- 
mercial paper  is  kept  in  lieu  of  ordinary  reserves.  These 
banks,  also,  lend  heavily  on  bourse  transactions  and  keep 

1  In  the  order  of  their  size,  these  are  the  Deutsche  Bank,  Dresdner  Bank, 
Disconto-Gesellschaft,  Bank  f.  Handel  u.  Industrie  in  Darmstadt,  SchaafiF- 
hausen'scher  Bankverein,  Berliner  Handels-Gesellschaft.  The  Konigliche  See- 
handlung  is  owned  by  Prussia,  having  been  founded  by  Frederick  the  Great 
to  aid  the  shipping  and  linen  industries. 


GERMAN   CREDIT  OPERATIONS  213 

balances  at  the  Kassenverein,  or  clearing-house  for  stock- 
exchange  dealings.^ 

§  3.  Immediately  on  the  outbreak  of  war  the  normal 
organization  of  credit  was  supplemented  by  the  passage, 
August  4,  1914,  of  the  measures  already  prearranged  for 
this  emergency.  Although  passed  on  that  date  by  the 
Reichstag,  the  copies  posted  that  evening  in  Berlin  were 
dated  August  2,  showing  that  the  mobilization  of  credit 
was  only  two  days  late  on  its  schedule. 

Of  these  measures,  the  Act  establishing  Darlehnskassen^ 
had  the  most  significance  for  credit  and  the  monetary 
circulation.     These  loan  bureaus,  based  on  the  theory  of 
the  pawn-shop,  were  first  tried  in  Prussia  in 
1848,   and  because  of  that  experiment  were  bureaus, 

used  again  in  the  wars  of  1866  and  1870.  In 
the  Prussian  experience  of  1848  the  amount  of  notes  is- 
sued was  largely  governed  by  the  financial  necessities  of 
the  government.  The  policy  of  these  institutions  in  1866 
was  severely  criticised  because  of  a  fear  that  the  notes 
would  become  a  means  of  increasing  the  permanent  debt 
by  a  secret  use  for  government  purposes.  They  are  now 
under  the  control  of  the  Reichsbank.  There  is  a  general 
administrative  board  in  Berlin,  and  a  board  of  directors 
for  each  bureau,  of  which  one  is  appointed  by  the  chancel- 
lor. This  imperial  representative  has  the  power  to  fix  the 
amount  of  loans  on  various  securities  and  to  decide  what 
loans  may  be  granted.  The  profits  are  to  be  set  aside  to 
aid  in  the  redemption  of  the  notes  which  are  to  be  retired 

*  Besides  commercial  banks  there  are,  of  course,  many  well-developed  mort- 
gage, land,  co-operative,  and  savings  banks. 

^  Reichsgesetzblatt,  August  4,  1914,  p.  340.  For  a  good  account  of  these 
bureaus,  c/.  W.  Lotz,  National  Monetary  Commission,  No.  508,  pp.  467-478, 
and  M.  Chase  Going,  loc.  cit.,  pp.  519-522.  The  German  text  of  the  Act  is 
given  by  J.  I.  Jastrow,  Im  Kriegszustand  (1914).  For  the  English  translation, 
cf.  Appendix  III,  E. 


214  CREDIT  OF  THE   NATIONS 

after  the  close  of  the  war.  As  an  evidence  of  prepared- 
ness, it  may  be  noted  that,  even  before  the  passage  of  the 
Act,  the  personnel  of  the  ninety  main  branches  had  al- 
ready been  appointed.^ 

The  bureaus  granted  credit  on  other  than  a  strictly 
commercial  basis,  and  to  the  borrower  gave  a  demand 
liability  in  the  form  of  paper  money  {Darlehnskassen- 
jcheine).  In  effect,  these  institutions  form  an  extension 
of  the  collateral  loan  department  (Lombards)  of  the 
Reichsbank. 

They  were  of  great  aid  in  placing  government  loans, 
by  opening  the  sluices  of  credit  to  those  who  had  less 
liquid  assets  than  were  required  by  the  large  banks  and 
the  Reichsbank.  They  enabled  owners  of  securities  and 
stocks  of  goods  to  coin  them  into  a  form  of  money.^ 
After  the  stock  exchange  was  closed,  this  was  an  effective 
means  of  raising  money  on  securities. 

There  were  five  classes  of  collateral  allowed: 

1.  On  obligations  of  the  empire  or  of  a  German  state, 
if  registered  with  the  department  of  public  accounts,  loans 
could  be  made  from  70  to  75  per  cent  of  the  quotations 

on  July  25,  1914.  If  the  borrower  should  be 
couaterai  uuablc  to  repay  the  loan,  or  interest,  when 
accepted         ^^^   |^|-jg  |qj^j^  burcau  could  scll  the  collateral 

for  loans. 

without  recourse  to  the  courts. 

2.  On  local  loans  and  stock  in  land  and  mortgage  banks, 
and  other  trustee  stocks  quoted  in  the  official  list,  to  70 
per  cent. 

3.  On  other  trustee  stocks,  non-trustee  stocks  quoted  in 
the  official  list,  and  so-called  home  Ultimopapieref  having 
a  fixed  return,  at  60  per  cent. 

'  Loveday,  loc.  cit.,  p.  48.     At  the  end  of  1915  there  were  99,  with  149  branches. 

^  In  France,  in  1830  and  1848,  special  credit  agencies  of  a  similar  character 
were  established.  In  1848  loans  on  merchandise  were  granted.  But  in  no  case 
were  these  institutions  (comptoirs  d' escomvte)  allowed  to  issue  notes. 


GERMAN   CREDIT  OPERATIONS  215 

4.  On  foreign  Ultimopapiere,  50  per  cent. 

5.  On  other  securities  with  a  varying  rate  of  return,  and 
non-perishable  merchandise,  40  per  cent  or  more.  The 
goods  pledged  may  be  agricultural,  mineral,  or  industrial 
products  located  within  the  empire,  and,  although  stamped 
with  a  government  seal,  they  are  left  in  the  hands  of  the 
owners. 

The  clientele  of  the  loan  bureaus  were  private  indi- 
viduals, co-operative  societies,  banks,  and  savings-banks, 
in  need  of  cash.  The  rate  of  interest  charged  was  higher 
than  the  bank  rate,  actually  Q}^  P^r  cent 
(but  for  advances  to  buyers  of  the  first  loan 
6  per  cent).  The  loans  ran  from  three  to  six  months,  but 
were  renewable,  and  were  for  sums  not  less  than  $25. 

The  loan  bureau  notes  (JDarlehnshassenscheiiie)  were  in 
the  nature  of  an  emergency  circulation  based  on  the  pledge 
of  securities  and  goods.  Although  not  a  full  legal  tender, 
they  must  be  accepted  at  par  by  the  imperial  character'of 
and  state  offices.  At  first  issued  in  denomi-  the  loan 
nations  of  5,  10,  20,  and  50  marks,  after 
August  31,  1914,  because  of  the  scarcity  of  small  silver, 
they  were  put  out  for  1  and  2  marks.  Their  value  was 
supported  by  the  Reichsbank,  which  accepted  them  on 
equal  terms  with  imperial  treasury  notes  and  counted 
them  as  cash  in  the  reserves  of  the  Bank;  but  they  are 
included  in  the  reports  of  the  Bank  under  treasury  notes. 
In  practice,  a  part  of  the  notes  have  been  sent  in  to  the 
Reichsbank  and  exchanged  for  Reichsbank  notes.'^  Origi- 
nally authorized  to  the  amount  of  $375,000,000,  they  have 
shown  a  tendency  to  increase  with  the  placing  of  new 
war  loans,  and  at  the  end  of  the  third  year  of  the  war  were 
outstanding  to  the  sum  of  $1,265,000,000. 

*  In  the  autumn  of  1914  the  Reichsbank  held  the  largest  part  of  them,  or 
over  $235,000,000.     In  July,  1917,  the  amount  had  fallen  to  $136,500,000. 


216  CREDIT   OF  THE  NATIONS 

In  a  time  of  emergency,  under  the  German  system  of 
credit,  it  is  to  be  remembered  that  assets  composed  of 
loans  on  collateral,  or  securities,  cannot  be  included  in  the 
two-thirds  cover  allowed  behind  the  Reichsbank  notes. 
Therefore,  the  Reichsbank  would  be  overwhelmed  by  the 
enormous  demand  for  loans  on  securities  certain  to  be  pre- 
cipitated by  a  serious  crisis.  Hence  the  Darlehnskassen 
were  again  established,  supposedly  as  a  temporary  device 
for  creating  an  emergency  circulation  based  on  collateral 
(Lombards).  Having  as  their  purpose  to  mobilize  a  large 
part  of  the  invested  wealth  of  the  country  by  coining  it 
into  a  means  of  payment,  they  gave  the  public 

Purpose.  -  .1     •        1  T       .  • 

the  power  to  meet  their  obligations  in  money, 
at  a  time  when  the  normal  kinds  of  money  were  scarce 
and  goods  were  not  easily  salable,  thus  in  theory  to 
avoid  a  moratorium,  and  to  enable  subscribers  to  war 
loans  to  pay  for  them  in  "cash."  Of  course  the  very 
serious  question  as  to  their  real  value  still  remains.  Al- 
though they  are  guaranteed  by  the  government,  no  gold 
reserve  is  held  for  their  redemption.  Hence  their  true 
worth  must  depend  on  the  future  value  of  the  goods  and 
securities  pledged  as  collateral. 

When  A  obtains  loan  notes  for  a  credit  based  on  goods 
or  securities  in  order  to  pay  for  an  imperial  bond,  the 
government   becomes   the   possessor  of  the  loan  notes, 

„   .    ^  which  are  in  due  course  paid  out  for  war  sup- 

Basis  O'  , .  —,,  , 

value  for  the  plies.  The  war  contractor  passes  them  on  as 
oan  notes.  ^vages  of  labor  or  in  payment  for  materials  and 
goods.  They  have  thus  entered  into  general  circulation. 
But  in  from  three  to  six  months  A  must  pay  back  his 
loan.  If  he  is  a  war  contractor  he  can  use  his  war  profits 
(when  not  taxed)  in  the  form  of  loan  notes  to  pay  off  his 
debt;  but  in  that  case  he  has  received  a  government  bond 
for  the  profits  of  his  business.     But  if,  due  to  the  disloca- 


GERMAN   CREDIT  OPERATIONS  217 

tion  of  trade  and  the  absence  of  foreign  markets,  A's  as- 
sets are  not  liquid,  he  will  have  obtained  from  his  busi- 
ness no  cash  as  a  means  of  paying  off  his  loan.  He  has, 
however,  his  imperial  bond,  which  he  can  use  as  the  basis 
for  a  new  loan  to  get  loan  notes  with  which  to  pay  off  his 
original  maturing  obligation  at  the  loan  bureau.  That 
done,  he  regains  possession  of  his  former  collateral ;  but  he 
is  in  debt  for  the  imperial  bond,  which  he  has  now  pledged 
for  his  new  loan.  He  is  worse  off  than  before.  He  has 
his  former  unliquid  assets  with  which  to  pay  his  debt  to 
the  loan  bureau  for  the  bond  he  bought.  Consequently 
the  bond  is  in  fact  only  as  good  as  the  securities  and 
goods  with  which  A  can  redeem  it.  That  is,  the  bond  is 
supported  by  unliquid  assets.  A  has  by  the  process  en- 
abled the  government  to  buy  and  destroy  war  supplies, 
and  has  mortgaged  his  assets  for  the  amount  of  destruc- 
tion represented  by  the  purchased  bond.  The  govern- 
ment in  the  future  must  take  in  taxes  from  the  assets  of 
A  and  others  the  means  to  pay  off  the  bond.  The  loan 
notes,  of  course,  have  added  nothing,  and  have  been 
only  a  means  of  shifting  the  ownership  of  wealth.  The 
system  has  provided  the  mechanism  for  a  very  dangerous 
pyramiding  of  credit  based  on  a  minimum  of  assets  not 
of  the  highest  quality. 

Supplementary  to  the  loan  bureaus  there  were  stddtische 
Darlehnskassen,  established  by  municipalities,  which  made 
loans  to  small  retailers  and  hand-workers  through  their 
co-operative  associations,  from  three  to  twelve 
months,  at  a  higher  rate  of  interest  than  lo^bureaus. 
charged  by  the  state  institutions.  The  associa- 
tions and  interested  persons  contributed  a  guaranty  fund 
to  which  the  municipality  usually  added  twice  as  much. 
Loans  were  granted  on  assets  satisfactory  to*  a  credit 
board  made  up  of  city  officials.     In  the  main  these  were 


218  CREDIT   OF   THE  NATIONS 

securities  which  were  unavailable  for  credits  at  the  loan 
bureaus.  As  little  discrimination  was  exercised  between 
those  who  wished  a  credit  for  productive  purposes  and 
those  unable  to  meet  their  obligations,  many  bad  debts 
were  made.  These  municipal  institutions  obtained  re- 
discounts from  the  Reichsbank  and  the  Ej-iegskredit 
banks. 

The  expansion  of  credit  to  cover  other  than  liquid 
assets,  so  that  the  possessors  of  almost  all  kinds  of  wealth 
could  coin  it  into  means  of  payment  through  the  loan 
bureaus,  necessarily  resulted  in  an  increase  in 
credit  the  volume  of  the  circulation,  irrespective  of 

^^^^ti*^  any  need  of  a  larger  medium  of  exchange  in 
trade.  Thus  the  swollen  credit  meant  a  swol- 
len circulation,  not  only  inconvertible  but  based  on  assets 
that  were  not  liquid.  Loans  by  the  Reichsbank  and  the 
loan  bureaus  both  resulted  in  an  increase  of  forms  of 
money;  but  this  was  not  true  of  another  war  device, 
known  as  the  Kriegskredit  banks  which  could  not  issue 
notes.  These  banks  were  organized,  unofficially,  all  over 
Germany.  Their  capital,  varying  from  several  million 
dollars  to  small  sums,  was  provided  by  the  large  private 
banks,  boards  of  trade,  and  even  by  states  and  municipali- 
ties. In  Berlin  the  Deutsche  and  Dresdner  banks  joined 
with  the  board  of  trade  to  establish  a  Kriegs- 
&Tgskredit  j^j.g^j^  ^^^^  Qjj  August  15,  1914,  with  a  capi- 
tal of  18,000,000  marks.  Elsewhere  capital 
was  partly  provided  by  a  state,  as  in  Saxony,  or  by  a 
municipality,  as  in  Frankfort.  These  banks  are  man- 
aged by  a  board  chosen  by  those  who  furnish  the  capital. 
Inasmuch  as  they  cannot  issue  notes,  they  obtain  cash 
by  rediscounts  with  the  Reichsbank,  which  agrees  to  loan 
to  an  amount  four  or  five  times  the  sum  of  the  guaranteed 
capital.     While  the  Reichsbank  aided  the  larger  business 


GERMAN  CREDIT  OPERATIONS         219 

houses  and  banks,  and  the  loan  bureaus  those  holding 
securities  or  goods,  the  Kriegskredit  banks  had  an  essen- 
tially industrial  character  and  served  the  small  trades- 
men or  those  without  collateral  who  could  furnish  only 
their  personal  obligations.  Loans  were  made  on  a  deal- 
er's stock  of  g'oods,  or  on  a  personal  note  guaranteed  by 
two  respectable  persons.  Also,  ordinary  discounts  were 
made;  a  seller  of  goods  drew  on  the  buyer,  the  buyer 
accepted  the  bill,  the  seller  discounted  it  at  the  Kriegs- 
kredit bank,  and  the  latter  rediscounted  it  at  the  Reichs- 
bank,  since  it  had  the  required  three  names.  In  addition 
book  credits  were  granted  to  customers  who  mortgaged 
to  the  Kriegskredit  bank  their  good  bills  receivable;  the 
bill  drawn  on  the  bank  by  the  customer  was  accepted, 
and  the  bank  discounted  its  own  acceptance  at  the 
Reichsbank. 

In  such  wise  it  was  planned  beforehand  to  send  streams, 
and  even  little  rills,  of  credit  to  all  classes  of  needy  per- 
sons in  every  part  of  a  thirsty  land.  By  arranging  that 
every  one  in  the  emergency  of  war  could  get  a  means 
of  payment,  every  one  could  meet  his  obligations  in 
"cash";  and  thus  it  was  intended  to  avoid  the  resort  to 
a  moratorium.  It  remains  to  be  seen  how  this  carefully 
devised  provision  bore  the  test  of  unexpected  difficulties. 

§  4.  The  mobilization  of  credit  jumped  with  the  mo- 
bilization of  the  army.  It  is  now  quite  clear  that  it  was 
expected  to  capture  Paris  in  a  few  weeks;  then  deal  sep- 
arately with  Russia;  have  a  short,  victorious  war;  levy 
no  war  taxation;  and  repay  all  expenses  of  the  conflict, 
as  in  1870-1873,  by  imposing  heavy  indemnities  upon  the 
conquered  nations.  We  now  all  know  how  that  plan 
miscarried  at  the  Marne.  But  there  have  also  been  some 
financial  Marnes. 


220  CREDIT  OF  THE   NATIONS 

In  spite  of  all  precautions,  the  outbreak  of  war  never- 
theless brought  on  the  inevitable  shock  to  the  monetary 
and  credit  organization.  Not  even  well-organized  Ger- 
Shock  to  niany,  with  all  her  forethought,  could  free  her- 

creditwhen  self  from  the  economic  interdependence  of 
trade  and  credit  between  all  commercial  coun- 
tries; and  as  German  exports  and  imports,  except  with 
small  neutral  states,  practically  ceased,  while  domestic 
production  of  goods  was  also  faced  with  violent  readjust- 
ments, credit,  which  is  based  on  transactions  in  goods, 
could  not  possibly  be  saved  from  shock.  If  goods  could 
not  be  produced  and  sold  as  before,  business  men  could 
not  meet  their  engagements,  no  matter  how  much  the 
circulation  was  expanded.  Without  doubt  the  shock  was 
more  or  less  expected;  for  it  was  minimized  by  the  sys- 
tematic reduction  of  commitments,  by  collecting  in  an- 
ticipation all  possible  sums  due  from  London,  Paris,  and 
Petrograd,  and  by  the  persistent  accumulation  of  gold  re- 
serves to  facilitate  the  granting  of  loans  in  an  emergency. 
Early  in  July  the  Reichsbank  urged  the  Berlin  banks  to 
increase  their  reserves  to  10  per  cent,  and  the  provincial 
banks  to  8  per  cent,  nearly  double  the  sums  usually  kept. 
As  elsewhere  the  bourse  first  registered  the  seismic 
shocks  to  credit.  After  the  assassination  of  the  Grand 
Duke  Ferdinand  at  Sarajevo,  June  28,  1914,  and  during 
July  the  Berlin  market  for  securities  showed 
tii^^bourse.  g^eat  uneasiness,  while  stocks  had  been  fall- 
ing seriously  in  Vienna.  Large  selling  orders 
hung  over  the  market.  On  July  23,  the  day^  after  Aus- 
tria sent  the  ultimatum  to  Serbia,  it  was  realized  in  Ber- 
lin that  the  war  could  not  be  localized,  and  a  panic  broke 
loose.  On  the  day  of  Serbia's  reply,  July  25,  securities 
fell  from  6  to  20  per  cent  under  heavy  liquidation.     On 

»  Cj.  Chronology,  p.  79. 


GERMAN   CREDIT  OPERATIONS  221 

July  29,  the  day  after  Austria  declared  war  on  Serbia, 
no  stock  transactions  were  carried  on  except  for  cash, 
and  on  July  31,  war  with  Russia  being  inevitable,  all 
operations  on  the  bourse  ceased.^  July  settlements  for 
stock  accounts  were  extended  by  bankers.  Inasmuch  as 
securities  were  now  unsalable,  the  Reichsbank  announced 
its  willingness  to  make  loans,  as  before,  on  securities 
(Lombards);  but  later  such  loans  were  assumed  by  the 
loan  bureaus. 

Then  ensued  a  currency  panic.  Most  persons  lost 
their  heads,  and  a  rush  began  for  money  to  be  hoarded. 
Depositors  started  runs  on  the  banks,  especially  for  gold. 
On  one  day,  August  3,  the  Berlin  savings-banks 
lost  over  $230,000,000.  As  a  result  of  hoard-  S^molSy. 
ing,  the  small  coins  disappeared  from  circula- 
tion. The  chancellor  had  been  authorized  in  July,  1913, 
to  coin  $30,000,000  in  silver,  of  which  $1,500,000  had 
been  coined  and  was  now  issued  through  the  Reichsbank. 
The  government  then  supplied  the  Bank  with  nearly  an 
equal  amount  of  token  coins.  Nevertheless,  the  Bank 
lost,  between  July  23  and  October  7,  1914,  some  $81,000,- 
000  of  its  small  money.  The  disappearance  of  fractional 
coins  forced  the  issue  of  small  denominations  of  imperial 
treasury  notes  (ten  marks)  and  (after  August  31)  of  loan- 
bureau  notes  for  1  and  2  marks.^ 

As  in  London,  the  private  banks  stopped  payment  In 
gold,  but  in  Germany  they  kept  on  in  their  way  and  went 
entirely  over  the  precipice.     Crowds  besieged       suspension 
the   Reichsbank   to   get  its   notes   converted      of  gold 
into  gold.      Thereupon  the  bank,  after  losing      P^y™^°  ^ 
a  considerable  sum  of  gold  in  one  day  (and  in  the  week 

*  Transactions,  but  only  for  cash,  were  resumed  in  November,  1915.  There 
are  as  yet  no  official  quotations  published. 

"  By  the  end  of  19i4  there  were  of  loan-bureau  notes  outstanding:  1  mark, 
65,500,000;  2  marks,  185,800,000;  5  marks,  225,400,000. 


CREDIT  OF  THE  NATIONS 

ending  July  31  over  $25,000,000),  gave  notice,  July  31, 
that  it  would  no  longer  pay  gold.  At  this  parting  of  the 
ways  we  find  a  striking  contrast  between  the  policy  of 
England  and  Germany,  which  was  afterward  to  lead  to 
momentous  results.  On  August  1  the  Reichsbank  posted 
notices  in  Berlin  calling  attention  to  the  fact  that,  since 
the  Reichsbank  notes  had  been  made  a  full  legal  ten- 
der in  1909,  they  were  as  good  as  gold  in  making  pay- 
ments, and  that  it  was  useless  to  present  them  for  redemp- 
tion. On  the  afternoon  of  that  day  the  Reichsbank 
ceased  to  redeem  its  notes  in  gold.  As  soon  as  specie 
payments  were  suspended,  bank-notes,  as  compared  with 
gold,  at  once  went  to  a  discount  in  the  shops.  Then 
economic  laws  were  met  by  the  force  of  absolutism.  The 
military  governor  of  Berlin  in  summary  fashion  declared 
the  notes  were  a  full  legal  tender  and  announced  that  any 
shop  refusing  to  take  them  at  par  would  be  punished  by 
confiscation  of  goods.  But  what  was  to  prevent  the  shop 
from  raising  its  prices  as  the  notes  depre- 
price^^  ciated.'^     The  autocratic  government  then  re- 

sorted to  the  mediaeval  device  of  fixing  prices; 
but  prices  have  since  risen,  in  spite  of  such  control,  over 
75  to  100  per  cent  above  the  normal  level.  Other  things 
than  the  quantity  of  money  and  its  regulation  (such  as 
limited  supply,  wages,  and  materials)  have  been  at  work 
on  German  prices. 

The  fundamental  difiSculty,  however,  in  such  a  crisis  was 
that  of  making  a  satisfactory  disposal  of  securities;  and 
above  all  there  was  the  breakdown  in  the  normal  produc- 
tion and  exchange  of  goods,  on  which  depended 
to  indus^y.*  the  ability  to  meet  obligations  at  their  matu- 
rity. The  harvest  of  1914,  which  was  good,  was 
largely  finished  before  war  was  declared.  But  industries 
were  at  once  crippled.     Concerns  not  engaged  in  produc- 


GERMAN   CREDIT  OPERATIONS  223 

ing  war  supplies  were  not  operating  to  more  than  25  per 
cent  of  capacity,  and  many  were  closed.^  Probably  50 
to  75  per  cent  of  the  workers  were  called  to  the  colors. 
It  is  said  that  one-third  of  the  men  in  the  iron  industry 
were  sent  to  the  front.  The  skilled  artisans  were  in  the 
army  or  in  munition  factories.  In  the  woollen  trade  the 
government  had  requisitioned  all  the  combing  and  spin- 
ning mills  for  military  uses.  Skilled  men  to  handle  the 
new  crop  of  sugar  were  scarce.  The  transportation  of 
goods  was  seriously  interrupted;  but  after  mobilization, 
when  the  railways  were  again  ready  for  traffic,  the 
producers  found  their  orders  for  goods  cut  down,  and,  of 
course,  had  no  foreign  orders.  Moreover,  the  crisis  led 
to  a  greatly  reduced  demand  for  articles  of  luxury,  the 
producers  of  which  thereby  lost  their  market.  In  the' 
early  months  of  the  war  there  were  many  laborers  out  of 
employment,^  so  that  their  buying  power  was  lowered. 
Foreign  trade  was  reduced  to  that  carried  on  with  such 
neutrals  as  Norway,  Sweden,  Denmark,  Holland,  and 
Switzerland,^  although  imports  in  considerable  amounts 
from  the  United  States  came  in  through  these  neutral 
countries.  The  merchant  marine  was  shut  up  in  home  or 
foreign  ports,  there  being  according  to  report  more  than 


'  The  Siemens-Schuckert  Works,  even  before  the  landsturm  was  called  out, 
lost  40  per  cent  of  their  men  on  mobilization.  The  Humboldt  Steel  Works, 
near  Cologne,  employing  4,000  men,  were  closed  early  in  August,  as  were  nearly 
all  the  great  iron-works  in  the  district  between  Diisseldorf  and  Duisburg. 
Works  in  Poland  were  also  closed  early.  Later  many  of  such  concerns  were 
diverted  to  the  production  of  war  supplies. 

2  In  Berlin,  in  September,  1914,  it  is  reported  that  100,000  men  were  unem- 
ployed because  of  shut-dowTis.  Of  wood-workers  over  50  per  cent,  and  of 
textile  operatives  over  30  per  cent,  were  out  of  work. 

^  Early  in  the  war  Germany  laid  in  through  Switzerland  large  stocks  of 
cheese,  fruits,  leather,  and  chocolate,  by  which  the  Swiss  could  pay  for  such 
German  products  as  coal.  At  present  German  coal  is  scarce  and  not  easily 
got  by  Switzerland.  Of  course,  before  Italy  entered  the  war,  goods  were  sent 
to  Germany  from  Italy  through  Switzerland. 


224  CREDIT  OF  THE   NATIONS 

one  thousand  idle  ships  in  Hamburg  alone.  Consequently, 
the  normal  production  of  goods  for  civilian  consumption 
was  very  seriously  interrupted;  and  the  importation  and 
exportation  of  goods  and  securities,  on  which  foreign 
credits  mainly  depended,  were  confined  to  narrow  limits. 
A  heavy  liquidation  of  foreign  securities  held  by  Ger- 
mans had  been  going  on  long  before  the  war,  and  German 
securities  did  not  have  a  favorable  market  even  in  neu- 
tral countries. 

In  spite  of  just  such  inevitable  handicaps  to  the  basic 
forces  of  credit,  it  was  the  German  plan  to  enable  nearly 
all  forms  of  wealth  to  be  coined  into  a  current  means  of 
payment  through  banking  credits.  Every 
of^credit!"  man  suffering  from  the  dislocation  of  trade, 
whose  goods  were  unsalable,  or  whose  collec- 
tions had  ceased,  was  by  credit  institutions  given  forms 
of  money  which  enabled  him  to  pay  "cash."  By  an  ex- 
pansion of  credit,  based  on  questionable  assets,  and  fol- 
lowed necessarily  by  an  expanded  circulation,  it  was  ex- 
pected to  escape  whatever  opprobrium  attached  to  a 
moratorium.^  It  may  be  that  greater  disadvantages  may 
come  from  the  liquidation  in  the  future  of  the  assets 
behind  this  swollen  credit  than  has  been  gained  by  the 
possible  avoidance  of  a  moratorium.  But,  if  the  situa- 
tion in  fact  proved  too  big  to  be  controlled,  and  if  a 
moratorium  was  necessary  after  all,  the  management  of 
the  system  of  credit  was  certainly  open  to  criticism. 

Although  no  general  moratorium  for  all  debts  was  pro- 

'  The  writer  of  the  following  extract  (quoted  by  M.  Chase  Going,  loe.  cit., 
p.  524),  dated  August  15,  1914,  had  a  great  but  misplaced  confidence  in  the  pos- 
sibility of  avoiding  a  moratorium:  "If  we  succeed  in  coming  through  the  next 
twelve  or  fourteen  days  without  a  moratorium,  in  a  time  when  all  our  neighbors 
directly  or  indirectly  affected  by  the  war  have  proclaimed  a  moratorium — the 
once  so  financially  strong  England  among  them — the  result  will  be  the  greatest 
economic  title  to  fame  for  Germany,  which  will  naturally  find  expression  in  the 
strengthening  of  our  credit  in  the  whole  outside  world." 


GERMAN  CREDIT  OPERATIONS         225 

claimed,  it  is  true,  nevertheless,  that  in  Germany  the 
same  effect  was  produced  in  other  ways.  As  a  result  of 
the  large  powers  conferred  on  the  Bundesrat  to 

„         ,  1      •  p  •        Moratorium. 

enact  measures  tor  the  regulation  oi  economic 
affairs,^  on  August  6,  1914,  the  term  for  bills  and  checks 
was  extended  for  thirty  days,  and  later  postponed  from 
time  to  time  until  May  17,  1915.  This  was  a  definite, 
public  moratorium  for  an  important  class  of  obligations. 
"The  civil  courts  were  also  empowered  to  extend  the 
time  for  payment  of  any  debt  contracted  before  July,  31 
1914,  for  not  more  than  three  months,  on  the  application 
of  the  debtor,  if  they  thought  his  circumstances  justified 
the  order  and  if  the  delay  would  not  inflict  undue  hard- 
ship on  the  creditor.  Further,  on  the  motion  of  the 
debtor,  the  courts  could  order  that  the  law  should  not 
take  its  course  in  case  of  failure  to  pay  rent,  mortgages, 
or  interest.  Such  debts  could  be  extended  for  three 
months,  and  by  later  legislation  the  payments  on  mort- 
gages and  debts  for  land  could  be  extended  for  six  months. 
The  processes  by  which  the  courts  could  grant  these  ex- 
tensions were  made  cheaper  and  more  simple  than  the 
usual  court  proceedings."  -  In  effect,  mortgages  were 
practically  postponed  until  the  end  of  the  war.  Gener- 
ally speaking,  appeals  were  made  to  creditors  to  be  as 
lenient  as  possible  and  the  collection  of  debts  was  not 
pressed.  To  say  there  was  no  moratorium  appears  to 
be  clearly  inaccurate. 


^  Act  of  August  4, 1914,  Reichsgesetzblatt,  p.  327.  The  Acts  in  furtherance  of 
this  purpose  are  voluminous  (Kriegsnotgesetze) . 

^  M.  Chase  Going,  loc.  cit.,  pp.  524-525.  This  writer  also  quotes  as  follows 
from  Professor  Jastrow  {Archiv  fur  Sozialwissenschaft,  December,  1914,  p.  116): 
"In  speaking  with  business  men,  one  hears  that  the  new  ordinances  [to  secure 
delay]  are  of  no  special  effect,  because  their  clients  have  for  some  time  lost  the 
habit  of  paying,  and  because  the  manufacturers  and  dealers  know  perfectly 
well  that  it  is  not  to  their  interest  to  ruin  their  customers." 


226  CREDIT  OF  THE  NATIONS 

§  5.  The  pivotal  matter  in  the  German  credit  situation 
lies  in  the  interruption  to  the  production  and  exchange 
of  goods  and  to  the  unhindered  disposal  of  securities. 
^   J.,  Out    of    these   fundamental    disarrangements 

Credit  ... 

and  the  there  come  to  the  surface,  as  indications,  the 

moratorium.  .•         ii  i      £  I'j.  i^i 

exceptional  demands  tor  credit  and  the  ac- 
companying calls  for  currency.  Inasmuch  as  the  loan 
bureaus  had  been  organized  to  take  care  of  loans  on 
securities,  and  therebj^  to  relieve  the  Reichsbank  to  that 
extent,  the  brunt  of  supplying  the  important  credits  to 
the  manufacturing  and  trading  establishments  neces- 
sarily fell  on  the  Reichsbank.  The  reason  why  additional 
credit  is  called  for  in  such  a  case  is  that  production  and  ex- 
change of  goods  are  not  functioning  normally.  In  a  time 
of  stress  credit  enables  a  crippled  business  man  to  post- 
pone to  the  future  the  realization  from  his  assets.  That 
is,  credit,  in  cases  where  there  is  a  fairly  certain  chance  of 
early  liquidation,  offers  all  that  is  legitimate  in  a  morato- 
rium; but,  when  credit  is  granted  on  assets  whose  liquida- 
tion even  after  the  war  is  problematical,  there  is  no  dif- 
ference in  results  between  such  credit  and  a  moratorium 
granted  in  war  time  precisely  because  assets  do  not  allow 
of  a  legitimate  loan.  The  difficulty  in  granting  credit,  in 
case  of  an  upheaval  of  production  and  trade,  is  to  discrim- 
inate in  favor  of  assets  that  may  be  soon  realized  upon  in 
cash.  But  it  is  no  solution  of  the  fundamental  difficulty 
to  make  "cash"  abundant  out  of  questionable  assets. 
Sooner  or  later  the  losses  from  such  assets  will  come  home 
to  the  issuer  of  the  notes.  Certainly  the  quality  of  the 
assets  accepted  by  the  loan  bureaus  must  be  seriously 
questioned.  But  even  those  of  the  Reichsbank  may  be 
made  unsound  by  the  course  of  events  in  the  war. 

The  Reichsbank  was  the  central  resource  for  credit. 
On  August  4,  1914,  measures  were  passed  to  widen  its 


GERMAN   CREDIT  OPERATIONS  227 

power  to  lend.  It  was  by  law  relieved  from  the  obliga- 
tion to  redeem  its  notes  in  gold.  This  suspension  of  specie 
payments,  of  course,  carried  with  it  a  sus-  p 
pension  by  the  government  and  by  other  to  lend 
banks.  The  imperial  treasury  notes  {Reichs- 
kassenscheine) ,  the  only  form  of  money  issued  by  the  gov- 
ernment,^ were  on  the  same  date  made  legal  tender,  al- 
though they  were  inconvertible.  Likewise,  the  imperial 
treasury  was  no  longer  obliged  to  redeem  the  silver,  cop- 
per, and  nickel  coins  in  gold,  but,  instead,  small  denomi- 
nations of  imperial  treasury  notes  or  Reichsbank  notes 
were  paid  out  in  return.  Also,  the  four  private  banks  of 
issue  were  permitted  to  redeem  their  own  notes  in  those 
of  the  Reichsbank.  In  short,  Germany  at  once  slid  from 
a  gold  to  an  inconvertible  paper  basis — with  all  that  such 
a  policy  implies. 

At  this  time  also  the  5  per  cent  tax  on  the  uncovered 
notes  of  the  Reichsbank  in  excess  of  the  Kontingent  was 
suspended.  In  this  way  one  of  the  checks  on 
the  extension  of  the  notes  was  removed.  It  gold  cover 
was  not  true,  however,  of  the  other  check  "°*  quAqa 
requiring  a  cover  for  the  notes  of  one-third  in 
cash.^     Nevertheless,  the  constituents  of  both  the  cash 

^  These  notes  serving  as  money  were  the  obligations  of  the  imperial  govern- 
ment, payable  to  bearer  on  demand,  redeemable  at  the  Reichsbank  in  cash, 
receivable  at  the  public  offices  for  government  dues,  and  formerly  issued  in 
denominations  of  50,  20,  10,  and  5  marks  (but  those  of  50  and  20  have  been 
retired).  The  Reichsbank  has  usually  held  on  an  average  about  25,000,000 
marks  of  them  in  its  reserves.  In  the  first  Act,  April  30,  1874,  120,000,000 
marks  were  authorized;  July  3,  1913.  another  120,000,000,  and  March  22,  1915, 
a  third  120,000,000.  This  last  issue,  however,  was  backed  cent  per  cent  by 
gold  or  Darlehnskassenscheine.  Its  purpose  was  to  provide  small  notes.  The 
treasury  notes  in  denominations  of  10  marks  were  withdra^vn  and  those  of 
5  marks  substituted.     In  effect,  there  was  no  increase  of  the  paper  money  by  it. 

'  Even  at  the  end  of  the  third  year  of  the  war,  on  August  7,  1917,  the  Reichs- 
bank^ held  of  gold,  silver,  and  treasury  notes  (including  Darlehnshassenscheine) 
$757,000,000  against  $2,226,415,000  notes,  thus  holding  a  surplus  of  $45,000,000 
over  the  required  one-third. 


228  CREDIT  OF  THE  NATIONS 

cover  and  the  two-thirds  of  commercial  cover  were 
modified.  The  loan-bureau  notes  were  accepted  for 
cover  on  the  same  basis  as  imperial  treasury  notes;  and 
when  the  former  were  received  in  exchange  for  Reichsbank 
notes  they  served  as  a  basis  for  the  issue  of  three  times 
as  many  more  Reichsbank  notes.  In  addition,  the  two- 
thirds  commercial  paper  was  widened  to  include  not  only 
imperial  bonds  with  a  maturity  of  three  months  but  also 
imperial  treasury  bills.^ 

■  In  Germany,  as  in  France,  the  central  bank  was  called 

upon  to  lend  directly  to  the  government.     In  the  first 

two  months  of  war  it  is  estimated  that  the  government 

needed  $500,000,000  for  the  army  and  navy 

^n^^™l^^     alone.2     For  mobilization  the  Reichsbank  was 

government. 

required  to  supply  some  $187,500,000  in  the 
very  first  days  of  war.  This  and  other  early  demands 
of  the  Treasury  were  met  by  discounting  treasury  bills. 
That  is,  these  bills,  or  unfunded  debt,  were  allowed  to 
become  part  of  the  paper  covering  the  two-thirds  of  the 
bank-notes.  The  bank  also  discounted  for  the  govern- 
ment Zollkriegswechsel,  or  bills  drawn  in  favor  of  the  gov- 
ernment to  meet  customs  duties  and  taxes  by  persons  in 
districts  threatened  with  invasion  who  could  not  pay  in 
cash.  Such  bills,  indorsed  by  the  Treasury,  were  dis- 
counted by  the  bank.  By  the  end  of  1914  the  loans  of 
the  bank  to  the  government  stood  at  over  $123,000,000. 

^  These  are  notes  of  the  empire  (Reichsschatzanweisungen)  which  run  on  an 
average  thirty  days,  and  are  used  as  a  quick  means  of  obtaining  cash  by  the 
Treasury.  They  are  deposited  with  the  Reichsbank  for  safe-keeping,  and  when 
the  government  account  runs  low  the  bank  buys  them,  crediting  the  account 
with  the  proceeds.  They  bear  no  fixed  interest,  but  are  discounted  like  other 
bills  at  the  prevailing  rate.  In  the  bank-accounts  they  appear  under  Wert- 
papieren,  separate  from  ordinary  bills  {Wechselbestdnde),  and  amounting  to 
perhaps  $30,000,000  in  normal  times. 

*  H.  Bottger,  Das  Geld  im  Kriege,  No.  26  in  series  Der  Deutsche  Krieg,  p.  10. 
Quoted  by  M.  Chase  Going,  loc.  cit.,  p.  526. 


229 

ac- 
3  of 
V.) 
:  to 
'  of 
on 

ment 


in- 
)00. 
an- 
;ash 
the 
the 

ent, 
was 
and 

•e 
ounts 

)ank. 

the 
hose 
11  as 
ture 
)  be 
lers. 
:chs- 
unts 
i,000 
1  in- 


GERMAN   CREDIT  OPERATIONS  229 

These  transactions  between  the  bank  and  the  empire  ac- 
count partly  for  the  very  sudden  increase  in  the  issues  of 
bank-notes  at  the  outbreak  of  the  war.     (See  Chart  V.) 

On  the  other  hand,  the  government  aided  the  bank  to 
increase  its  reserves.  On  August  2  the  "war  chest"  of 
$51,000,000^  was  turned  over  to  the  Reichsbank;  and  on 
August  7,  $2,950,000  of  fractional  silver  and  Government 
token  money  were  deposited  to  the  credit  of  aid  to 
the  Treasury.  To  these  were  added  $8,750,000  '®^®'^®^- 
of  imperial  treasury  notes;  so  that  the  government  in- 
creased the  reserves  of  the  bank  by  over  $62,000,000. 
In  the  run  upon  the  bank,  before  suspension  was  an- 
nounced, the  bank  had  lost  by  withdrawals  of  cash 
$40,000,000  (of  which  $25,000,000  was  gold).  Thus  the 
government  had  more  than  made  up  to  the  bank  the 
losses  by  withdrawals.     (See  Chart  V.) 

Apart  from  the  immediate  demands  of  the  government, 
the  Reichsbank,  as  the  ultimate  source  of  credit,  was 
called  upon  for  loans  to  meet  the  needs  of  industry  and 
commerce  in  general  which  could  not  be  car- 

PrcsstiTG 

ried  by  other  credit  institutions.  The  distur-  for  discounts 
bance  to  production  and  markets  made  it  nee-  ^*e|^hsbank 
essary  for  well-established  houses  to  borrow  on 
a  large  scale.  The  private  banks  could  not  meet  the 
emergency.  Then,  as  in  every  panic,  there  were  those 
who  needed  loans  to  prevent  threatening  ruin,  as  well  as 
those  who  wished  to  borrow  in  order  to  anticipate  future 
contingencies.  Furthermore,  large  advances  had  to  be 
granted  to  establishments  engaged  in  filling  war  orders. 
So  large  were  these  inevitable  demands  upon  the  Reichs- 
bank that,  with  the  loans  to  the  empire,  the  discounts 
rose  from  $200,000,000  on  July  23,  1914,  to  $1,152,000,000 
on  August  15,  or  more  than  five  times.     This  sudden  in- 

1  C/.  p.  202. 


230  CREDIT  OF  THE   NATIONS 

crease  of  discounts  actually  outstripped  the  issue  of  notes 
before  it  subsided.  It  thus  appears  that  the  volume  of 
credit  needed  by  the  public  was  fully  as  large  as  that  re- 
quired by  the  government.  There  is,  then,  in  these  de- 
mands a  full  and  obvious  explanation  of  the  sudden  and 
precipitate  rise  (as  shown  in  Chart  V)  in  the  two  related 
items  of  discounts  and  notes  in  the  bank-account.  As 
the  pressure  for  credit  converged  on  the  Reichsbank,  the 
movement  of  items  in  its  accounts  were  typical  of  what 
was  going  on  in  the  whole  fabric  of  German  credit.  What 
happened  in  August  and  September,  1914,  was  only 
the  beginning  of  an  extension  of  credit  (as  evidenced 
by  the  discounts  and  notes)  which  has  gone  on  rising 
portentously  to  the  end  of  the  third  year  of  the  war. 
There  is  here  presented  to  the  eye  (in  Chart  V)  the  whole 
story  of  swollen  credit  in  Germany.  Since  borrowers, 
according  to  the  monetary  habits  of  the  country,  call  for 
FoUowed  b  forms  of  money,  the  rise  of  loans  is  necessarily 
expansion  accompauicd  by  the  rise  in  the  volume  of 
notes.  In  other  words,  the  increase  in  the 
circulation  goes  on  without  any  relation  to  the  need  for 
a  medium  of  exchange  in  transactions  between  buyers 
and  sellers  of  goods. ^  The  circulation,  on  the  contrary, 
is  increased  in  direct  ratio  to  the  needs  for  credit. 

The  relative  inflation  of  the  German  circulation  in 
three  years  of  war,  as  contrasted  with  that  before  the 
war,  may  be  thus  briefly  expressed  (in  millions  of  dollars) : 

'  The  explanation  that  money  has  been  hoarded,  and  that  the  increase  of 
war  goods  has  been  so  great  as  to  require  a  larger  volume  of  money,  has  been 
put  forward  as  a  reason  for  the  enormous  increase  of  bank-notes.  No  one  can 
pretend,  however,  that  the  exchanges  of  goods  within  Germany,  whose  exports 
and  imports  have  been  practically  cut  off,  and  whose  civilian  production  has 
been  greatly  reduced,  can  now  need  four  times  the  normal  volume  of  money 
used  in  prosperous  years  of  peace.  Without  doubt,  the  expansion  of  notes 
represents  a  swollen  volume  of  credit,  which  is  made  up  of  promises  to  pay  de- 
pendent for  their  fulfilment  on  the  production  of  Germany  far  in  the  uncertain 
future. 


GERMAN  CREDIT  OPERATIONS 


23i 


19U 

1917 

Gold  outside  Reichsbank     

$610 
340 

$310 
640 

Gold  in  Reichsbank 

Total  gold 

$950 

$950 

Notes  of  Reichsbank  

$500 

$2,213* 
1,265 

Darlehuskassenscheine 

Total  currency 

$500 

$3,478 
560 

Less  circulation  for  occupied  territory . . .    $250 
Assume   gold    outside    the   bank  to  be 
hoarded 310 

$2,918 

*  July  31,  1917. 


There  is  thus  an  expansion  in  the  circulation  of  about 
sixfold. 

It  is  to  be  noted,  moreover,  that  even  after  the  cash  re- 
serves reached  about  $600,000,000  (see  Chart  V),  the  in- 
crease of  discounts  and  notes  has  continued  to  show  a 
phenomenal  rise  on  a  stationary  reserve  of  ^^  ansion 
specie.  The  increase  of  loans  is  the  more  ex-  when  placing 
traordinary  when  it  is  remembered  that  the 
Reichsbank  has  been  relieved  by  the  loan  bureaus  from 
carrying  the  burden  of  advances  on  securities.  In  other 
words,  the  loans  of  the  Bank  do  not  record  all  of  the  ex- 
pansion of  credit  to  the  public.  Certain  spasmodic  en- 
largements of  discounts^  on  the  generally  rising  level  are 
observable  (see  Chart  V)  about  the  time  of  placing  new 
war  credits,  when  every  possible  aid  was  given  to  bor- 
rowers who  expected  to  subscribe.  Such  times  of  ex- 
pansion of  credit  were  shared  in  very  noticeably  by  the 
Reichsbank;  but  although  there  was  a  reaction  after  the 

'  These  were  in  August  and  December,  1914;  April,  October,  and  December, 
1915;  April,  October,  and  December,  1916;  and  March,  1917. 


232  CREDIT  OF  THE  NATIONS 

peak  of  the  expansion,  the  next  occasion  for  expansion 
always  started  from  a  new  higher  level.  By  way  of  com- 
parison with  the  highest  issue  of  notes  in  the  panic  j^ear 
of  1907  (during  which  year  discounts  never  exceeded  the 
notes)  of  about  $460,000,000,  the  highest  point  during 
the  first  three  years  of  the  European  War  was  $2,213,- 
000,000,  July  31,  1917.  The  rate  of  discount  which  had 
been  raised  to  6  per  cent  was  reduced  to  5  per  cent  on 
December  23,  1914. 

After  September,  1916,  it  is  significant  that  the  dis- 
counts rose  far  above  the  level  of  the  note-issues.  With- 
out an  increase  of  specie  reserves  and  imperial  treasury 
notes  (including  loan-bureau  notes)  the  requirement  of 
a  one-third  cash  cover  evidently  prevented  the  further 
rise  of  the  bank-notes.  But  the  augmenting  discounts 
must  have  been  satisfied  by  other  forms  of  payment  than 
notes.  The  rise  of  deposits  which  took  place  must  be 
due  to  expanding  loans  and  not  necessarily  to  the  carrying 
of  actual  money  to  the  bank  for  deposit.  Doubtless,  also, 
the  agitation  carried  on  in  the  financial  journals,  and  by 
organizations  such  as  the  Berlin  Chamber  of  Commerce, 
to  encourage  the  habit  of  settling  by  checks  and  restrict- 
ing the  use  of  paper  money  had  some  effect.  Certain  it 
is  that,  although  deposits  fluctuated  more  or  less,  they 
rose  from  $236,000,000,  July  23,  1914,  to  $1,420,000,000, 
June  30,  1917. 

German  credits,  furthermore,  were  ingeniously  manip- 
ulated to  increase  note-issues  in  a  subsidiary  institution 
in  Belgium,  known  as  the  Societe  Generale  de  Belgique. 

To  the  Belgian  seller  of  goods  to  Germans  was 
Beirium  given,  not  money,  but  a  credit  on  the  books 

of  the  Reichsbank.  With  this  credit  he  could 
obtain  payment  from  the  Societe  Generale  in  its  notes. 
But  the  Belgian  bank  was  permitted  to  use  this  debt  in 


GERMAN  CREDIT  OPERATIONS         233 

Berlin  as  a  basis  for  issuing  three  times  as  many  notes. 
Thus  the  onus  of  increasing  a  part  of  the  issues  was  laid 
on  even  other  shoulders  than  those  of  the  loan  bureaus. 

§  6.  The  emphasis  placed  on  the  accumulation  of  a 
large  stock  of  gold  in  the  Reichsbank  has  assumed  almost 
the  character  of  a  fetich.  The  loss  of  gold  during  the 
runs  at  the  outbreak  of  the  war  seemed  to 
have  shown  that  it  would  be  impossible  to  JJ,uect  *oid 
continue  convertibility  of  the  notes.  That 
conclusion  implied  the  disappearance  of  the  gold,  if  it 
left  the  possession  of  the  bank.  In  normal  times  gold, 
when  paid  out,  would  return.  In  the  present  situation, 
however,  there  was  not  only  the  expectation  of  hoarding, 
but  of  exportation.  Cut  off  from  the  receipt  of  gold  in 
payment  of  export  balances,  and  rather  forced  to  ship 
sonie  gold  in  return  for  needed  imports  from  neutral 
countries,  a  firm  control  over  the  stock  of  gold  seemed 
to  be  the  order  of  the  day.  In  any  event,  no  chances 
were  taken.  The  estimate  placed  on  the  possession  of  a 
substantial  fund  of  gold  evidently  had  greater  force  than 
the  alternative  of  the  disturbances  inevitably  accompany- 
ing an  inconvertible  and  depreciated  currency.  Doubt- 
less, in  this  as  in  other  decisions,  the  German  belief  in  a 
short  war  and  an  early  victory  became  an  obsession,  which 
regarded  depreciation  of  the  notes  as  unthink-    _ 

11  •   -n  •  1  1  p  1  Depreciation. 

able,  especially  with  a  theory  oi  money  whose 
value  was  supposed  to  depend  so  largely  on  the  will  of  the 
state.  This  was  a  serious  error,  a  financial  Marne,  the 
ensuing  results  of  which  will  be  difficult  to  measure.  Al- 
most immediately  the  notes  depreciated,  and  by  the  end 
of  the  third  year  of  the  war  were  at  a  discount  in  neigh- 
boring neutral  countries  of  from  43  to  49  per  cent.  That 
statement  carries  its  own  lesson. 


234  CREDIT   OF  THE   NATIONS 

In  Germany,  since  the  private  banks  carry  very  small 
reserves,  the  stock  of  gold  is  to  be  found  either  in  the 
Reichsbank  or  in  the  hands  of  the  public.     Before  the 
war  the  amount  of  gold  in  the  country  was 
holdings  estimated  at  from  $950,000,000  to  over  $1,100,- 

whenwar        000,000  of  which  the  Reichsbank  then  held 

began. 

only  about  $340,000,000;  so  that  the  gold  bore 
a  ratio  of  over  70  per  cent  to  the  note-issues  of  $472,000,- 
000.  There  was  thus  left  in  the  circulation,  or  outside 
the  bank,  some  $610,000,000,  as  a  possible  resource,  irre- 
spective of  sums  held  by  the  allies  of  Germany.  In  1913, 
the  Austro-Hungarian  State  Bank  was  reported  as  hold- 
ing $255,000,000  of  gold.^  The  gold  holdings  of  Bul- 
garia and  Turkey  were,  of  course,  inconsiderable. 

Systematic  efforts  were  then  made  to  increase  the  gold 
funds  in  the  Reichsbank.  In  addition  to  the  war  chest 
of  $51,000,000  turned  over  to  the  bank,  as  already  men- 
tioned, the  Bundesrat  on  November  23,  1914, 
collect  gold  passed  an  act  penalizing  the  buying  or  selling 
i?  !^®      ,       of  gold  at  a  rate  higher  than  the  face  value 

Reichsbank.  °  .  i  •    •   • 

of  the  corns;  prohibiting  the  exportation  of 
gold  under  penalty  of  a  year's  imprisonment  and  a  fine 
of  $1,250;  and  forbidding  publication  of  the  rates  of 
foreign  exchange.  Without  doubt  some  gold  was  ob- 
tained from  Austria  and  Belgium.  The  main  success, 
however,  in  building  up  the  gold  stock  in  the  bank  was  a 
remarkable  campaign  conducted  among  the  people  to 
induce  the  exchange  of  gold  coin,  or  articles  of  gold,  for 
Reichsbank  notes  as  a  patriotic  duty.  A  canvass  from 
house  to  house,  in  shops,  in  small  villages,  through  the 
press,  schools,  soldiers,  mutual  benefit  societies,  movies, 

'The  Imperial  Bank  of  Russia  then  carried  in  gold  about  $800,000,000;  the 
National  Bank  of  Belgium  $66,000,000;  the  Bank  of  France  over  $800,000,000, 
and  the  Bank  of  England  $190,000,000.     Cf.  supra,  pp.  103,  171  n.  1,  179. 


A 


ger:man  credit  operations       235 

and  sellers  of  beer  brought  out  of  hoards  or  from  circula- 
tion some  $200,000,000  of  gold  in  the  first  seven  months 
of  the  war.^  Much  emphasis  is  put  upon  the  fact  that 
the  exchange  was  wholly  voluntary;  but  effective  oflBcial 
pressure  was  applied  to  prevent  hoarding  and  to  encourage 
the  deposit  of  gold.  Gold  was  even  smuggled  across  the 
borders  of  Holland  on  the  persons  of  spies.  As  a  conse- 
quence, the  gold  reserves  of  the  bank  steadily  increased 
until  the  end  of  1915,  when  a  final  level  of  attainment 
seems  to  have  been  reached  at  something  over  $600,000,- 
000.  In  the  three  years  the  highest  point  was  gained 
May  31, 1917,  at  $641,500,000.  (cf.  Chart  V).  From  all 
sources,  accordingly,  the  bank  enlarged  its  stock  of  gold 
by  about  $300,000,000  through  energy  and  effective  or- 
ganization. If  the  estimates  of  the  amount  in  the  coun- 
try at  the  beginning  of  the  war  be  accepted,  there  must 
still  be  about  $300,000,000  in  hiding.  In  any  event, 
that  the  maximum  of  accumulation  of  gold  has  been 
reached  seems  to  be  generally  admitted.  On  the  other 
hand,  it  is  to  be  noted  that,  in  addition  to  the  stock  in 
the  bank,  some  of  the  gold  withdrawn  early  in  August, 
1914,  went  to  Scandinavia,  Holland,  and  Switzerland 
(estimated  at  perhaps  $90,000,000),  and  that  other  sums 
had  to  be  sent  out  in  attempts  to  steady  German  ex- 

•  In  an  address  to  the  New  York  Chamber  of  Commerce,  after  his  retm-n  from 
Berlin  in  April,  1917,  Ambassador  Gerard  is  reported  to  have  described  the 
hunt  for  gold  in  Germany  as  follows  (New  York  Times,  July  15,  1917) : 

"Signs  were  hung  up  in  the  street  cars  sajdng,  'He  who  keeps  back  a  gold 
piece  injures  the  Fatherland.'  Soldiers  were  given  a  two  days'  leave  of  absence 
if  they  would  produce  a  twenty-mark  gold  piece.  For  that  they  were  given  a 
twenty-mark  note,  just  as  good  as  the  gold  in  Germany.  School  children,  if 
thej'  produced  a  ten-mark  gold  piece,  were  given  ten  marks  in  paper  and  a 
half  holiday.  In  many  of  the  theatres  if  a  person  paid  for  his  ticket  in  gold 
he  would  receive  a  ticket  good  for  another  day.  I  know  of  one  American 
woman  who  was  visited  by  two  detectives  in  her  apartment  in  Berlin,  who  said : 
'  We  hear  you  have  some  gold,  and  if  you  do  not  give  it  to  us  now,  we  will  search 
the  apartment  and  break  everything  in  it.'" 


236  CREDIT  OF  THE  NATIONS 

change  in  neutral  countries,  or  to  pay  for  supplies  not  oth- 
erwise purchasable.  At  all  events,  at  the  end  of  the  third 
year  of  the  war  it  seems  that,  while  the  volume  of  credit 
goes  on  expanding  unceasingly,  the  stock  of  gold  has 
reached  its  maximum.  Although  it  had  doub- 
increased  out  led,  the  percentage  of  gold  to  the  notes  which 
of  proportion    before  tJ^g  ^^r  was  over  70  per  cent,  had  fallen 

to  gold.  '■ 

to  48.6,  November  23,  1914;  to  38.9,  December 
23,  1915;  to  30,  December  30,  1916;  and  to  28,  June  30, 
1917.  There  could  be  no  more  convincing  evidence  of 
the  increasing  strain  on  the  central  institution  of  the  Ger- 
man credit  system. 

Again,  we  have  an  illustration  of  the  wide  difference 
produced  in  the  value  of  the  notes  by  immediate,  as 
contrasted  with  ultimate,  redemption  in  specie.  When 
Effe  t  of  ^^^  notes  are  convertible  on  demand  they  re- 

immediate       main  at  par  with  gold.     Moreover,  redemp- 

redemption.        ,«  i^*  p  mi  ■  ±_  i 

tion  on  presentation  oi  the  notes  at  once  de- 
termines the  quantity  that  will  remain  in  circulation.  No 
more  will  then  be  retained  in  the  hands  of  the  public  than 
is  required  for  purely  monetary  purposes  as  a  medium  of 
exchange  or  for  reserves.  That  is,  an  inflated  condition 
of  the  circulation  is  impossible  when  there  is  immediate 
redemption  in  gold.  But  there  is  far  more  in  the  matter 
than  this  monetary  result.  In  a  country  in  which,  be- 
cause of  monetary  habits,  the  notes  are  a  necessary  com- 
plement to  loans,  so  that  the  volume  of  notes  follows  the 
volume  of  expanding  credit,  immediate  redemption  of  the 
notes  prevents  the  expansion  of  credit  beyond  the  point 
of  soundness.  That  is,  it  serves  as  a  test  of  the  solvency 
of  a  credit  transaction.  If  a  bank  expands  its  loans,  so 
that  it  issues  to  borrowers  more  notes  than  it  can  redeem 
on  demand,  it  must  either  stop  lending  or — what  in  effect 
is  the  same  thing — accumulate  more  gold  in  its  reserves; 


GERMAN   CREDIT  OPERATIONS  237 

to  secure  more  gold,  the  bank  must  raise  the  rate  of  dis- 
count, which  acts  as  a  brake  on  additional  loans.  On  the 
other  hand,  suspension  of  specie  payments  removes  these 
checks  on  the  inflation  of  credit.  The  only  Hmit  to  credit 
then  is  the  Kmit  to  the  issue  of  notes.  In  Germany  the 
only  other  check  was  that  the  notes  should  not  exceed 
three  times  the  cash  reserves.  Consequently,  the  future 
solvency  of  the  Reichsbank  depends  upon  the  liquidity 
of  the  other  two-thirds  of  cover  made  up  of  commercial 
paper.  It  is  inevitable  that,  in  this  unprecedented  con- 
dition of  business,  many  of  these  assets  could  not  possibly 
be  liquidated,  even  in  depreciated  paper,  to  say  nothing 
of  gold. 

The  science  of  money  and  credit  has  not  yet  fully 
worked  out  the  psychological  effect  of  a  large  fund  of  gold 
held  in  reserve  behind  notes  that  are  inconvertible.  Such 
gold  is  in  a  way  a  hoard;  but,  of  course,  when  inpou^ei^ijii. 
held  by  the  issuer,  it  would  have  a  greater   ity  and 

.    n  IT  •    •  i       ii        i*    i  depreciation. 

mnuence  on  public  opinion  as  to  the  luture 
value  of  the  notes  than  if  this  gold  had  disappeared  into 
private  hoards.  Even  if  there  is  gold  in  the  possession  of 
the  public,  or  obtainable  by  foreign  trade,  it  is  no  inexpen- 
sive task  to  mobilize  it  to  be  used  for  redemption  sooner  or 
later.  Its  retention  in  a  conspicuous  repository,  however, 
where  its  amount  is  known  to  all  the  world,  gives  a  posi- 
tive basis  for  estimating  the  future  chances  of  redemption. 
The  extent  of  the  depreciation  of  the  paper,  in  spite  of 
a  hoard  of  gold  behind  the  inconvertible  notes,  seems  to 
measure  the  guess  of  the  community  as  to  the  time  and 
certainty  of  redemption  at  par.  When  the  note-issues  are 
largely  increased  it  gives  good  evidence,  as  viewed  by  the 
public,  of  a  postponement  of  convertibility,  and  the  notes 
are  sure  to  depreciate  relatively  to  gold.  The  increasing 
volume  of  inconvertible  notes  does  not  require  us  to  be- 


238  CREDIT   OF  THE   NATIONS 

lieve  that  prices  have  risen  because  there  has  been  more 
money  placed  in  circulation,  but  only  that  the  paper 
money  in  which  prices  are  expressed  has  depreciated  be- 
cause the  conditions  affecting  its  value  have  become  less 
favorable.  We  see  the  same  processes  at  work  every 
day  in  the  market  for  securities,  when  a  non-dividend- 
paying  stock  changes  in  price  as  the  earnings  of  the  prop- 
erty change.  In  any  event,  as  the  volume  of  Reichsbank 
notes  has  risen  to  unheard-of  sums,  after  the  accumulation 
of  gold  has  come  to  a  standstill,  the  prospect  of  redemp- 
tion has  become  more  remote,  and  consequently  the  quo- 
tation of  the  gold  price  of  a  paper  mark  has  steadily  fallen. 
The  error  in  Germany,  as  in  France,  lies  in  tying  up  the 
borrowing  operations  of  the  government  with  the  issue 
of  the  notes  which  form  the  circulation  of  the  country, 
and  thus  invalidating  the  very  standard  in  which  prices 
and  contracts  are  expressed.  The  mistake  is  the  fateful 
confusion  between  the  fiscal  and  the  monetary  functions 
of  the  state. 

§  7.  Since  credit  involves  the  obligation  to  return  an 
equivalent  in  the  future,  this  unparalleled  inflation  of 
credit  high  and  low  raises  the  question  as  to  its  probable 
d  solvency.  Germany  has  not  had  from  the 
capital  being  beginning  as  much  surplus  capital  as  Great 
Britain  or  France,  but  she  is  thrifty,  and  her 
industrial  organization  is  remarkably  efficient  in  making 
the  most  of  very  moderate  resources.  Just  the  same,  she 
and  the  other  belligerents  are  drawing  down  the  reservoir 
of  their  accumulated  wealth  and  capital.^  The  dislocation 
of  industry  caused  by  the  war  has  diverted  vast  quanti- 
ties of  labor,  capital,  and  materials  from  the  normal  pro- 
duction of  peace  goods  to  the  making  of  naval  and  mili- 

'  Cf.  Chapter  II,  §  4. 


GERMAN  CREDIT  OPERATIONS         239 

tary  supplies,  which,  having  been  destroyed  on  a  scale 
never  equalled  in  the  history  of  the  world,  has  vanished 
in  thin  air.  Yet  now  as  always  the  thing  fundamental  to 
a  country's  staying  power,  as  well  as  to  its  credit,  is  the 
quantum  of  tangible  present  goods  on  which  the  popula- 
tion can  draw  at  once.  How  is  it  possible  for  Germany 
to  go  on  enormously  increasing  her  promises  to  pay 
wealth  in  the  future  at  the  same  time  that  her  accumu- 
lated wealth  and  capital  is  being  reduced  by  the  frightful 
expenditures  of  war? 

Credit  is  a  means  of  throwing  burdens  forward  on  the 
future;  it  enables  the  needy  to  tide  over  a  present  shortage 
in  the  hope  of  larger  resources  hereafter.  But  for  how 
long  a  period  will  credit  take  care  of  a  short- 
age ?  If  goods  are  not  forthcoming  to  replace  ^°^  ^^ 
those  destroyed,  the  surplus  is  pro  tanto  being  assets  be 
wiped  out.  If  so,  how  can  credit  obligations  liquidated? 
be  actually  liquidated  ?  If  met  by  an  increase 
of  paper  promises  to  pay,  such  a  device  only  postpones, 
it  does  not  remove,  the  inevitable  day  of  reckoning  based 
on  goods.  The  Germans  did  not  expect  so  long  a  war. 
What  we  are  witnessing  to-day  in  that  country  is  an  ex- 
periment in  the  length  of  time  that  credit  can  carry  an 
isolated  community  in  a  condition  of  want  and  constant 
destruction  of  goods.  Her  private  credit  liabilities  are  al- 
ready enormously  expanded — irrespective  of  the  imperial 
debt.  The  whole  matter  pivots  on  the  quality — that  is, 
on  the  liquidity  by  sale  and  conversion  into  cash — of  the 
assets  which  now  support  the  vast  structure  of  demand 
credits.  In  normal  times  the  solvency  of  credit  is  being 
constantly  tested  by  recurring  liquidation  at  short  peri- 
ods, so  that  the  entire  volume  of  assets  is  always  in  a 
process  of  renewal  and  thus  kept  healthy  and  sound. 
Stop  this  process  of  renewal  and  decay  sets  in.     If  these 


240  CREDIT  OF  THE  NATIONS 

assets  held  by  German  credit  institutions  are  "canned," 
without  the  possibilitj'  of  payment  at  maturity  in  short 
periods  of  time,  they  cannot  long  remain  sweet. 

In  respect  of  the  destruction  of  wealth  and  capital,  that 
is  going  on  in  all  the  belligerent  nations.  It  is  not  con- 
fined to  the  Teutonic  Powers.     In  the  working  of  credit, 

however,  a  very  different  and  far-reaching  re- 
demands  suit  is  produced  in  Germany  from  that  in  the 
present  Allied  couutries,  and  for  a  very  obvious  reason. 

Germany  is  practically  cut  off  from  foreign 
trade  (except  that  with  Switzerland,  Holland,  Denmark, 
Norway,  and  Sweden);  hence  she  must  rely  mainly  on 
the  goods  which  can  be  produced  within  her  own  boun- 
daries. The  war  can  be  carried  on  only  by  goods  strictly 
in  hand,  and  not  in  the  bush.  There  must  be  enough 
present  goods  to  supply  immediate  consumption  and  de- 
struction. If  England  or  France  wish,  by  credit  opera- 
tions with  the  United  States,  to  replace  with  American 
goods  those  consumed  or  destroyed  on  their  own  firing- 
line,  they  can  do  so.  In  effect  they  can  fill  up  by  credit 
the  reservoir  of  goods,  as  fast  as  they  are  drawn  down  by 
war,  through  replenishment  of  present  goods  from  an 
outside  source.  Not  so  with  Germany.  When  she  is 
compelled  to  borrow  only  at  home — within  the  family,  so 

to  speak — she  cannot  restore  her  losses  except 
borrowing  out  of  her  owu  internal  production.  Ger- 
fncrease  many,  by  credit  offered  to  her  own  people  for 

present  goods  uow  destroyed,   can  give  promises  to 

pay  from  the  proceeds  of  goods  produced  in 
the  distant  future,  but  that  does  not  provide  her  with 
more  goods  for  consumption  to-day.  All  she  can  do  to 
meet  the  wearing-down  process  is  to  try  to  increase  her 
normal,  peace-time  capacity  of  production. 

The  war,  however,  has  very  seriously  reduced  her  nor- 


GERMAN  CREDIT  OPERATIONS 


241 


mal  power  of  production,  as  may  be  illustrated  by  the 
following  diagrams: 


WAR  (II) 


FOREfGN 

PEACE  (I) 

TRADE 

PRODUCT 
CIVILIAN 

S 

Y 

ARMY 
NAVY 

X 

LABOR 

CAPITAL 

MATEBSALS 

Reduction  of 

German 

production 

and 

consumption. 


In  X  -\-  Y  (I)  are  contained  the  total  output  in  goods 
from  German  labor,  capital,  and  materials  in  times  of  peace 
to  supply  both  the  civil  and  military  population  of  about 
68,000,000,  together  with  the  gains  from  ex- 
changing some  of  her  products  in  foreign  trade. 
In  the  second  diagram  are  seen  the  first  effects 
of  war  by  the  change  in  direction  of  productive 
industry,  so  that  Y,  the  goods  produced  for 
war  purposes,  shows  a  disproportionate  increase  as  con- 
trasted with  X,  the  non-military  consumption  of  the  civil 
population.  In  addition,  the  block  representing  the 
gains  of  foreign  trade  disappears.  Then,  later,  come  the 
effects  of  destruction  on  the  factors  of  production,  which 
influence  the  whole  output  of  both  X  and  F.  The  shaded 
parts  of  the  blocks  below  the  area  of  products  show  what 
has  happened  to  these  factors — labor,  capital,  and  ma- 
terials. The  withdrawal  of  men  from  industry  to  the 
front  alone  reduced  the  labor  force;  but  as  the  war  has 
gone  on  millions  have  been  killed,  maimed,  or  taken 
prisoners.  The  intense  pressure  on  industry  and  the 
need  of  labor  in  producing  both  X  and  Y  explains  the 
policy  of  frightfulness  in  deporting  laborers  from  Belgium, 
Poland,  and  Serbia.     The  waste  of  capital,  as  previously 


242  CREDIT  OF  THE  NATIONS 

explained/  has  gone  on  apace.  The  cessation  of  foreign 
trade,  except  through  neighboring  neutral  countries,  has 
produced  a  shortage  in  such  necessary  materials  as  cot- 
ton, copper,  rubber,  etc.;  the  lack  of  fodder  has  forced  a 
diminution  of  cattle,  and  the  scarcity  of  labor  has  lessened 
the  output  of  coal  and  the  eflSciency  of  transportation. 
Such  depletion  of  the  factors  of  production  could  have 
but  one  result  on  the  total  output  of  products,  and  as  the 
needs  of  the  army  come  first,  the  heaviest  burden  of  re- 
duced consumption  must  fall  upon  the  civilian  popula- 
tion. There  seems  to  be  considerable  evidence  to  prove 
that  if  the  military  consumption  remains  at  its  present 
level  the  productive  power  of  the  country  will  not  suffice 
to  provide  more  than  the  minimum  of  existence  to  the 
civilian  population.  The  diversion  of  production  to  war 
goods  has  practically  taken  away  the  former  surplus  above 
necessaries.  Indeed,  it  is  a  question  whether  production 
has  not  already  fallen  below  the  line  of  necessity  for 
many  of  certain  classes  who  cannot  meet  the  enhanced 
costs. 

So  obvious  is  the  reduction  in  the  production  of  goods 
that  he  who  runs  can  read  the  inevitable  effect  upon  the 
basis  of  credit.^     It  is  impossible  that  the  great  mass  of 

assets  behind  the  demand  liabilities  should  be 
credit  liquid.     Yet  with  steadily   lessening  produc- 

d^^btf^i  tion,  the  volume  of  demand  credit  obligations 

is  increasing.     If  the  assets  are  not  now  liquid, 
then  the  solvency  of  credit  has  already  gone.     Neverthe- 


»  Cf.  Chapter  II.  §  4. 

^  The  textile  industries,  for  instance,  have  been  hard  hit  by  the  war.  Of 
their  own  initiative  many  establishments  have  already  closed.  But  now,  as 
in  the  case  of  other  industries,  the  textile  concerns  are  threatened  with  com- 
pulsory syndication  by  government  authoriti(>s,  accompanied  by  the  shutting 
down  of  unnecessary  factories.  In  the  Rhineland  and  Munster  the  textile 
workers  show  a  falling  off  of  nearly  50  per  cent  as  compared  with  1915. 


GERMAN  CREDIT  OPERATIONS         243 

less,  it  may  be  argued  by  the  authorities  that  all  claims 
can  be,  and  are,  constantly  liquidated  in  bank-notes,  and 
that  solvency  has  been  maintained.  The  coinage  of  a 
diminishing  stock  of  goods,  however,  into  an  increasing 
volume  of  demand  liabilities,  or  bank-notes,  undermines 
the  worth  of  the  notes,  so  that  the  liquidation  is,  after  all, 
deceptive.  Certainly  the  depreciation  of  the  paper  money 
reflects  this  loss  of  support.  So  long  as  appearances  are 
kept  up  by  trading  with  a  depreciated  currency,  the  sol- 
vency of  credit  exists  only  on  paper;  economically,  so  far 
as  a  basis  of  exchangeable  goods  is  concerned,  the  credit 
is  not  solvent  even  now.  An  increase  of  the  forms  of 
money  and  credit  by  an  autocratic  government,  without 
a  corresponding  increase  in  basic  goods,  may  succeed  in 
tiding  hard-pressed  borrowers  over  a  temporary  emer- 
gency during  the  short  period  until  goods  can  be  again 
normally  produced  and  sold,  or  until  time  is  given  to 
permit  gradual  liquidation  without  too  much  sacrifice. 
But  will  this  hold  good  for  the  great  cataclysm  in  which 
Germany  finds  herself,  now  unexpectedly  prolonged  into 
the  fourth  year.?*  Who  is  able  to  say  what  will  be  the 
worth  of  the  expanded  volume  of  assets  after 
the  war.f^  But  any  one  must  know  that  they  ^redS. 
are  not  now  liquid.  To  increase  demand 
forms  of  credit  and  money,  without  a  corresponding  in- 
crease of  quick  assets  convertible  into  cash,  produces  what 
we  call  an  inflation  of  credit.  Inflation  of  money  is  the 
symptom,  inflation  of  credit  is  the  disease. 

§  8.  How  far  the  basis  for  credit  operations  has  been 
undermined  may  be  learned  by  the  extent  of  the  break- 
down, not  only  in  domestic  production  and  trade  but  in 
the  unprecedented  dislocation  of  Germany's  international 
dealings.     The  two,   of  course,   are  closely  interwoven. 


244  CREDIT  OF  THE  NATIONS 

As  she  got  more  and  more  away  from  the  old  industrial 
regime  to  that  of  new  power  and  machinery,  she  had 
Subtraction  been  exporting  manufactures  to  pay  for  one- 
of  German  fifth  to  ouc-f ourth  of  her  imported  materials 
oreign  a  e.  ^^^  food.  When  cut  ofl  from  imports  by  the 
closing  of  her  seaports,  the  total  volume  of  her  production 
was  lessened.  As  exports  of  gold  were  inhibited,  it  was 
dijQScult  to  produce  enough  coal  and  other  goods  with 
which  to  pay  for  the  reduced  stream  of  imports  from 
Sweden,^  Holland,  and  Switzerland.  It  is  to  be  noted 
that  Germany's  largest  trade  had  been  with  Russia,  Great 
Britain,  France,  and  the  United  States.  To  lose  all  this 
trade  at  once  was  a  staggering  blow.  Credit  must  shrink 
accordingly  with  the  emaciation  of  trade.  If  there  are 
no  markets,  there  can  be  no  sales,  no  demand;  and  assets 
fade  away. 

For  instance,  our  exports  to  Germany,  which  were 
$344,000,000  in  1914,  dropped  the  next  year  to  $28,800,- 
000;  and  our  imports  fell  from  $189,900,000  to  $91,300,000. 
Basis  of  Now  they  are  nil.     Before  the  war  England 

credit  took  $360,000,000  of  imports  from  Germany, 

removed.  ^^^  ^^^^  j^^^,  $442,000,000  of  goods.^  This  in- 
terchange, of  course,  has  ceased.  German  exports  in  1912 
to  British  possessions  amounted  to  $477,000,000;  to 
Africa,  Asia,  North  and  South  America,  and  Australasia, 
$765,000,000.  Take  away  this  vast  trade,  and  we  may 
understand  the  volcanic  effect  thereby  caused  in  business 
engagements  and  credit.  It  is  estimated  that  of  all  Ger- 
man trade  70  per  cent  was  sea-borne,  of  which  40  to  50 
per  cent  was  with  countries  now  hostile  to  her.     Most  of 

^  Since  the  early  closing  of  the  ports  of  Hamburg  and  Bremen,  Liibeck  and 
Stettin  have  exported  and  imported  largely  by  the  Baltic  from  Scandinavia. 
These  ports  became  the  busiest  cities  in  Germany.  Through  them  chemicals 
long  went  to  the  United  States. 

*  Cf.  supra,  p.  77. 


GERMAN  CREDIT  OPERATIONS         245 

her  ships  are  idle.  The  imports  of  Russian  flax,  hemp, 
and  raw  materials,  and  exports  to  Russia  of  her  manufac- 
tured goods,  stopped.  The  foreign  markets  for  her  sub- 
sidized beet-sugar  were  largely  closed,  except  through 
Sweden,  Denmark,  Holland,  and  Switzerland;  and  the 
same  was  true  of  her  dyestuffs,^  drugs,  chemicals,  potash, 
and  coal.  The  production  of  copper  at  home  was  about 
50,000  tons  against  a  normal  consumption  of  250,000  tons, 
the  difference  coming  chiefly  from  the  United  States.  To 
a  great  extent  she  was  cut  off  from  copper,  nickel,  petrol, 
wool,  cotton,  rubber,  and  jute.  The  silk,  steel,  woollen, 
and  jute  industries  inevitably  fell  off  in  production.  In 
that  way  the  basis  of  much  credit  was  removed.  The 
general  stock  of  other  than  war  goods  being  lessened, 
there  was  less  to  be  consumed.  As  the  labor,  capital,  and 
materials  were  shortened,  so  must  the  volume  of  goods 
have  declined.  On  the  other  hand,  there  were  large 
profits  in  war  industries,  such  as  those  turning  out  ma- 
chinery, foundry  work,  leather,  fats  and  oils,  clothing, 
textiles,  and  foodstuffs.  But  not  only  was  there  in  gen- 
eral a  material  subtraction  of  basic  goods  on  which  credit 
rested,  but  the  inability  to  meet  their  engagements  has 
inevitably  injured  the  estimate  of  German  credit  in  the 
markets  of  the  world. 

§  9.  A  phenomenon  common  to  both  belligerent  and 
neutral  countries  during  this  war  has  been  a  rise  of  prices. 
At  once  the  causal  connection  between  money  and  credit, 
on  the  one  hand,  and  the  level  of  prices,  on  the  other,  is 
suggested.     Certainly  the  documents  of  each  country  will 

^The  color-plants  and  the  potash-mines  were  turning  out  not  over  20  per 
cent  of  their  normal  product  late  in  1914,  largely  because  of  a  shortage  of 
labor  and  coal.  The  Newcastle  coal  had  been,  of  course,  cut  off,  and  the 
Westphalian  coal  was  less  desirable. 


246  CREDIT  OF  THE  NATIONS 

furnish  much  material  taken  from  the  years  of  war  to  test 
the  theories  of  price.  However  that  may  be,  it  is  entirely 
clear  that  for  Germany  at  least  we  have  no  very  useful 
-.„.,.  ^       data  as  yet  for  a  final  discussion  on  this  piv- 

Official  data  *'  ,  ,  ^    . 

as  to  prices  otal  problem  of  credit  and  prices.  There  is 
not  much  more  than  hearsay  evidence.  We 
know,  of  course,  that  German  prices  have  risen;  unoflS- 
cially,  prices  in  general  are  said  to  have  risen  75  or  100 
per  cent  in  the  early  part  of  1916.  In  the  autumn  of 
1914,  according  to  the  German  press,^  copper  had  risen 
76  per  cent;  aluminum,  212;  antimony,  366;  nickel,  85. 
Potatoes,  wheat,  meat,  fats,  and  all  foodstuffs  have  ad- 
mittedly risen  to  high  levels.  The  same  is  true  of  horses 
bought  in  Scandinavia  and  Denmark  at  double  former 
prices.  Unimpeachable  evidence  comes  in  of  a  merciless 
increase  in  the  cost  of  living,  which  has  laid  a  heavy  bur- 
den on  the  poorer  classes,  causing  suffering,  a  demand 
for  higher  wages,  and  serious  discontent  and  occasional 
rioting.^  Cotton,  rubber,  wool,  and  jute,  together  with 
petrol,  nitrates,  and  materials  for  war  goods,  have,  of 
course,  risen  markedly. 

Nevertheless,  Germany  offers  no  field  for  a  normal 
study  of  prices,  and  for  an  obvious  reason.  The  very  first 
upward  movements  of  prices  were  the  signals  for  a  drastic 
regulation  of  maximum  prices  by  a  paternalistic  and  au- 
tocratic government.     There  was,  and  still  is,  an  elabo- 

'  Franhfurier  Zeitung,  November  12,  1914. 

''"Investigations  conducted  by  Voriodrts  in  September,  1915,  showed  that 
the  price  of  food  had  increased  85  per  cent  in  Berlin  since  the  beginning  of  the 
war.  The  prices  of  52  common  articles  of  food  were  taken  from  the  price- 
lists  of  the  large  co-operative  stores  and  the  aggregate  cost  of  one  pound  of 
each  article  was  found  to  have  been  35  marks  in  August,  1914,  but  to  have 
increased  to  65  marks  in  August,  1915.  The  official  index  number  for  food 
prices  in  Berlin  also  shows  an  increase  of  82  per  cent  between  July,  1914,  and 
December,  1915."  M.  Chase  Going,  loc.  cit.,  p.  545.  Also,  the  ration  pro- 
vided for  a  German  marine  per  week,  which  had  been  25  m.,  12  pfg.,  in  July, 
1914,  was  39  m.,  13  pfg.,  in  August,  1915,  showing  an  increase  of  66  per  cent. 


GERMAN   CREDIT  OPERATIONS  247 

rate  system  for  controlling  the  prices  of  all  necessary  ar- 
ticles of  food.  The  extent  to  which  this  interference 
with  price-fixing  has  gone  on  has  probably  never  before 
been  equalled.  Moreover,  as  time  has  passed, 
ordinary  property  rights  have  disappeared  r^^fa^^°* 
before  the  necessities  of  war,  until  military  ex-    of  prices 

,  .  „     vitiates  usual 

igencies  have  come  to  create  a  conception  or  inferences, 
a  national  communism  in  which  the  state  may 
requisition  whatever  it  needs,  even  if  all  the  economic 
surplus  should  be  taken.  Additional  taxation  being  little 
used,  goods  are  obtained,  if  not  by  loans,  bordering  on 
forced  subscriptions  from  municipalities  and  others,  then 
by  commandeering.  Prices,  under  such  conditions,  have 
little  meaning  to  the  economist. 

And  yet  the  man-who-knows-everything-absolutely  is 
willing  to  say  that  the  admitted  rise  of  prices  is  due  to 
inflation.  It  is  not  the  place  to  discuss  here  the  theory 
that  prices  must  rise  with  an  inflation  of  the  inflation  not 
currency ;  or,  if  prices  have  risen — assuming  a  sufficient 
the  rightness  of  the  theory — that  there  must 
have  been  an  inflation  of  the  currency.  There  is  only 
space  to  say  here  that  no  substantial  body  of  facts  has 
ever  been  collected  which  prove  this  theory;  while  so 
many  other  factors,  which  affect  prices  even  more  than 
the  quantity  of  money  possibly  could,  are  entirely  over- 
looked.^ The  facts  as  to  the  increase  of  money  and 
credit  in  Germany  have  already  been  given  and  dis- 
cussed.^ The  additional  paper  circulation  put  out — as  a 
symbol  of  expanded  credit — since  the  war  began  has  been 
about  $2,800,000,000  (bank-notes,  loan-bureau  notes, 
and  imperial  treasury  notes).  Not  more  than  about 
$300,000,000  of  the  stock  of  gold  known  to  be  in  the 

»  Cf.  the  author's  Principles  of  Money  (1903).    Cf.  supra,  pp.  66-68, 116-118, 
182.  ^  Cf.  supra,  §  5. 


248  CREDIT  OF  THE  NATIONS 

country  before  the  war  is  supposed  to  be  still  hoarded. 
Certainly,  some  $2,500,000,000  may  be  regarded  as  a  fair 
approximation  to  the  addition  made  to  the  money  of 
Germany  since  July,  1914. 

The  inflation  of  German  money  and  credit  is  unmis- 
takable; but  it  is  not  necessary  to  assume  it  as  the  cause 
of  the  admitted  rise  of  prices.  That  the  paper  mark  has 
_        .  ^        depreciated  wherever  a  direct  comparison  is 

Depreciation  ^  ,  ^  ^ 

of  notes  made  between  it  and  gold  in  neutral  markets, 

one  cause.  gych  as  Amsterdam  and  Copenhagen,  there  is 
no  doubt  whatever.  The  suspension  of  gold  redemption 
and  the  unrestricted  increase  in  the  circulation  are  suflS- 
cient  reasons  for  the  depreciation,  as  already  presented.^ 
If  there  is  a  depreciation  of  the  money,  of  course,  prices 
registered  in  it  will  rise  accordingly.  Were  everything 
else,  for  example,  to  remain  the  same,  and  a  country  were 
suddenly  by  law  to  drop  from  a  gold  to  a  silver  standard 
at  one-half  the  market  value  of  gold,  prices  would  inevi- 
tably be  doubled.  In  short,  whatever  the  cause  of  the 
depreciation  of  the  common  money  of  account,  the  paper 
mark,  the  general  level  of  prices  must  be  affected  by  it, 
were  no  other  causes  at  work. 

But  there  were  other  causes  at  work  on  prices.  It  is 
one-sided  to  discuss  changes  of  price  by  considering  only 
the    money  or  credit    by   which  goods  are    exchanged. 

Obviously,  the  expenses  of  producing  goods 
important  affcct  their  prices.  Higher  wages  have  been 
ht^^^°*         always  regarded  as  a  reason  for  raising  prices; 

and  the  same  is  true  of  a  serious  increase  in 
the  costs  of  materials,  and  a  rise  in  freight  transporta- 
tion for  materials  as  well  as  for  finished  goods.  All 
these  causes  were  actively  at  work  in  Germany.  More- 
over,  many  necessary  materials,  like  wool,  cotton,  and 

I  See  §§  6,  7. 


GERMAN   CREDIT  OPERATIONS         249 

copper,  had  a  scarcity  value.  The  high  prices  of  Ger- 
man textiles  are  fully  accounted  for  by  the  scarcity 
prices  of  raw  cotton  and  wool  and  the  increased  price  of 
labor.  In  addition,  a  sudden  and  imperative  war  de- 
mand for  petrol,  cloth,  nitrate,  steel,  and  similar  prod- 
ucts needed  for  munitions  must  have  had  an  inevitable 
effect  on  their  prices.  Therefore,  while  it  is  unnecessary 
to  claim  that  the  ease  with  which  credit  was  obtained  in 
Germany  had  no  influence  on  the  prices  of  goods  which 
the  borrower  wished  to  purchase,  it  is  evident  that  it  was 
only  one,  and  not  the  most  important  one,  of  the  factors 
working  together  to  raise  prices.  If  price  is  a  ratio  of 
exchange  between  goods  and  some  standard  money,  then 
it  is  as  important  to  consider  the  forces  working  on  the 
goods  side  of  the  ratio  (such  as  wages  and  materials)  as  it 
is  those  on  the  money  side  (such  as  the  quantity  in  cir- 
culation, its  redemption,  etc.). 

§  10.  Between  countries  bills  of  exchange  perform  the 
same  essential  service  as  that  of  checks  between  persons 
in  domestic  trade.  On  the  shipment  of  goods  the  bill  is 
drawn  as  a  claim  on  the  buyer  in  the  land  to  which  the 
goods  are  moving,  and  when  accepted  it  becomes  the  best 
of  short-term  commercial  paper  discounted  by  interna- 
tional banks.  Like  other  forms  of  legitimate  credit,  it 
springs  from  and  is  based  on  the  movement  of  goods  or 
securities.  When  international  trade  ceases,  as  is  largely 
the  case  with  Germany,  the  basis  of  this  credit  disap- 
pears. The  foreign  exchange  problem  of  Germany,  there- 
fore, was  not  only  made  very  important,  but  it  is  inter- 
esting by  its  contrast  to  that  of  England.^ 

The  rise  in  the  number  of  marks  which  had  to  be  paid 
in  Germany  for  claims  on  money  in  other  countries,  or, 

»  Cf.  Chapter  HI,  §  9. 


250 


CREDIT  OF  THE  NATIONS 


vice  versa,  the  decline  in  the  amount  of  money  of  other 
countries  which  would  buy  a  claim  on  marks  in  Germany 
— is  what  is  meant  by  the  fall  in  German  ex- 
German  change.  From  the  middle  of  July,  1914,  in 
exchange  in      Berlin,  the  price  of  exchange  was  against  Ger- 

July,  1914.  '  .  ,  °        .       , 

many,  that  is,  more  marks  were  required  to 
buy  bills  on  foreign  centres.  This  is  another  way  of  say- 
ing that  there  was  a  strong  demand  in  Berlin  for  claims 
to  money  elsewhere,  indicating  a  tendency  to  send  funds 
abroad.  As  an  exception,  however,  claims  on  St.  Peters- 
burg and  Vienna  were  abundant.  Russian  exchange  fell 
in  Berlin  to  204  (par  being  216)  and  Austrian  to  82  (par 
being  85),  showing  that  funds  were  moving  from  St. 
Petersburg  and  Vienna  to  Berlin.  The  opposite  was  true 
respecting  Paris  and  London;  English  and  French  capital- 
ists were  withdrawing  their  balances  from  Germany,  Aus- 
tria, and  Russia  through  Berlin.  Hence,  since 
there  was  a  strong  demand  in  Berlin  for  claims 
on  London  and  Paris,  the  price  of  bills  of  ex- 
change on  those  cities  rose;  that  is,  German 
exchange  fell.  The  rate  on  London  rose  early 
to  20.57  (par  20.43  marks  for  £l),  and  by 
November,  1914,  to  22.20,  disclosing  a  fall  of 
over  8  per  cent  below  par.^  On  and  after  November  12, 
1914,  quotations  of  exchange  were  not  allowed  to  be  pub- 


Funds 

moving  from 
Vienna  and 
St.  Peters- 
burg to 
Berlin, 
thence  to 
Paris  and 
London. 


'  November  5"  and  11,  1914,  the  Frankfurter  Zeitung  gave  the  following  quo- 
tations of  exchange: 


November  5 

November  11 

Par 

Checks  on  Holland 

186.25 

21.70 

207.50 

4.40 

(i.e.,  $1,048) 

187.25 

22.20 

204.50 

88.70 

170 

20.43 
216 
4.2 

80 

Engli.9h  sovereigns 

Russian  notes 

United  States  greenbacks 

Swiss  francs 

GERMAN  CREDIT  OPERATIONS         251 

lished.     It  will  be  remembered  that,  at  the  very  beginning 
of  the  war,  when  money  was  hoarded,  the  banks  presented 
bills  at  the  Reichsbank  for  discount  to  get  notes  with 
which  to  meet  cash  demands  at  their  own  counters;  so 
that  note-holders  presented  notes  at  the  Reichsbank  for 
gold.     After  some  losses  of  gold,  the  Bank,  as  has  been  ex- 
plained, suspended  specie  payments.     Obviously,  foreign 
correspondents  wanted  gold  exchange.    The  price  to  which 
exchange  on  London  rose  showed  a  large  profit 
on  the  shipment  of  gold;  but  the  export  of  gold       ance  of 
was  forbidden.     In  other  words,  the  "  shipping-       ^oj^ts"^" 
point"  disappeared,  and  the  means  of  restrict- 
ing the  price  of  exchange  between  limits  based  on  the  ex- 
pense of  shipping  gold  out  of  and  into  Germany  ceased  to 
exist.     In  September,  when  the  Reichsbank  notes  had 
been  sent  by  neutrals  in  payments  to  London  at  a  dis- 
count of  20  per  cent,  they  were  refused.'^ 

In  exchange  operations  with  other  countries  German 
bills  were  at  a  discount.     In  respect  of  Switzerland,  Ger- 
many had  been  the  best  customer  for  her  special  prod- 
ucts, such  as  fresh  and  condensed  milk,  cheese, 
chocolate,  and  fruit,  and  sent  her  the  sugar,      German 
coal,    and    minerals    she    lacked.     The    war     switzeri^d! 
greatly  reduced  this  trade,  and  caused  a  drop 
in  exchange.     In  November,   1914,   100  German  marks 
could  be  bought  in  Berne  for  111  Swiss  francs  (par  being 
123,5).     Later  on,  as  German  coal  came  with  difficulty  to 
market  because  of  poor  transportation  and  scarcity  of 
labor,  Germany  was  unable  to  pay  in  goods  for  all  the 
foodstuffs    surreptitiously    entering    Germany    through 

1  In  August,  1914,  for  foodstuffs  bought  In  Scandinavia  and  Holland,  Germans 
paid  by  drafts  on  supposedly  German  funds  in  London.  WTien  these  drafts 
were  sent  to  London  banks  for  collection  payment  was  refused.  Cf.  LondoD 
Economist,  August  29,  1914,  p.  387. 


252  CREDIT  OF  THE  NATIONS 

Switzerland.  Consequently,  as  gold  shipments  were  neg- 
ligible, claims  to  money  in  Germany  continued  to  fall  in 
price  in  Switzerland.  In  November,  1916,  Germany  is 
reported  to  have  sent  $2,500,000  in  gold  to  the  Swiss 
National  Bank  to  support  the  price  of  exchange.  Evi- 
dently the  causes  of  the  decline  in  German  exchange  were 
too  deep  to  be  reached  by  such  inadequate  shipments  of 
gold;  for  bills  on  Germany  were  then  quoted  at  84.60, 
showing  a  depreciation  of  31  per  cent.  The  sending  of  a 
supply  of  coal  to  Switzerland  was  later  made  contingent 
on  a  loan  to  Germany;  but  there  is  no  evidence  that  the 
establishment  of  such  credits  has  successfully  restored 
German  exchange  to  normal  conditions;  for  quotations 
went  to  67.50  (July  5,  1917),  showing  a  discount  of  45.3 
per  cent. 

The  exchange  markets  in  Scandinavia  and  Holland  were 
similarly  affected.  The  large  trade  with  Holland  and 
Sweden,  and  the  unwillingness  of  Germany  to  send  gold 
_,   ,  had  the  usual  result.     All  the  facts  are  not 

Exchange  on 

Sweden  and  yet  kuowu.  We  do  know,  however,  that  the 
exports  of  dyestuffs  was  kept  up  as  long  as 
possible,  mainly  through  Sweden;  but,  at  the  end  of  the 
third  year  of  the  war,  July  5,  1917,  exchange  on  Stock- 
holm showed  a  depreciation  of  47.1  per  cent  (par  being 
112.5);  and  on  Copenhagen  of  44.6  per  cent.  In  the  be- 
ginning of  1915  extensive  sales  of  Russian  and  American 
securities  were  made  through  Holland.  Also,  coal  and 
minerals  were  sent  to  her  from  Germany.  Moreover,  as 
early  as  November,  1914,  and  since,  more  or  less  gold  has 
been  sent  to  Holland.  To  that  extent  the  sale  of  German 
bills  has  been  economized;  but  the  gold  shipments,  while 
producing  some  temporary  effects  on  exchange,  have  been 
inadequate.  On  July  5,  1917,  these  bills  bore  a  discount 
in  Amsterdam  of  43.2  per  cent. 


GERMAN  CREDIT  OPERATIONS         253 

In  South  America,  where  Germans  had  owned  street 
railway  Hnes,  water-works,  and  lighting  or  power  compa- 
nies before  the  war,  more  or  less  liquidation  has  since 
been  going  on.  To  pay  Germans  for  these  credits,  the 
South  American  banks  have  transferred  funds  to  Berlin. 
If  they  drew  on  balances  in  New  York  they  thus  aided 
the  American  market  for  bills  on  Germany,  by  offsetting 
sums  due  from  Germans.  In  all  possible  ways  of  this 
sort,  Germany  was  trying  to  pay  for  such  imports  as 
could  find  their  way  directly  or  indirectly  into  her  ter- 
ritory. 

During  the  time  when  the  United  States  was  neutral, 
American  goods  went  to  Germany  through  neutral  Euro- 
pean ports  in  considerable  quantities.     Cotton  was  sent 
even  through  Switzerland.     That  is,  Germans 
owed  us;  but  as  very  few  exports  came  to  us     exc^geon 
from  them,  as  time  went  on,  a  balance  was     New  York 
due  us  on  the  merchandise  account.     The  ob-     neutrauty. 
vious  resort  of  borrowing  here  and  establishing 
German  credits  was  had,  but  no  large  German  loans^  were 
placed  in  the  United  States.     Dyestuffs  and  securities  of 
American  railways  and  industrials  sent  here  helped  the 
quotations  of  the  mark;  but  in  spite  of  all  devices  they 
declined.     In  Berlin  the  dollar  rose  as  high  as  6.30  (par 
being  about  4.2  marks) .    In  New  York,  exchange  is  quoted 
on  the  price  in  dollars  of  4  marks,  par  being  95.25  cents; 
but  it  has  declined  even  to  66.25  cents,  showing  a  depre- 
ciation of  over  30  per  cent.     Bills  being  a  claim  to  marks 
in  Germany,  and  as  paper  marks  were  inconvertible  into 

*  Imperial  German  war  bonds  were  offered  and  sold  here  at  prices  fluctuating 
with  the  quotations  for  exchange.  In  such  transactions  the  rate  of  exchange 
was  used  as  a  measure  of  the  depreciation  of  the  mark,  and  the  price  of  bonds 
changed  accordingly.  Imperial  5  per  cent  loans  were  offered  in  New  York  in 
December,  1915,  at  the  price  of  $202.50  per  1,000  marks,  showing  a  deprecia- 
tion of  25  per  cent. 


254  CREDIT   OF   THE   NATIONS 

gold,  the  exchange  not  supported  by  something  akin  to 
redemption  could  fluctuate,  like  the  paper,  for  various 
reasons;  as  a  consequence,  there  arose  speculation  in  Ger- 
man exchange,  just  as  in  anything  else  whose  price  fluc- 
tuates. All  dealings  in  German  exchange,  of  course, 
ceased  when  the  United  States  declared  war  against  Ger- 
many in  April,  1917.^  For  some  time  previously  the 
bankers  in  New  York  and  Berlin  had  been  reducing  their 
balances  in  the  respective  centres. 

The  German  explanation  of  the  fall  in  exchange  seems 
to  be  that  it  is  solely  a  matter  of  exports  and  imports  of 
goods  and  securities;  that,  being  unable  to  export,  they 
are  not  in  a  position  to  keep  up  the  rate  of  ex- 
exp^ation  chaugc;  that  payments  for  carrying  commerce 
of  the  fau  in     ^j^^  ^j^g  expenditure  of  travellers  in  Germany 

exchange.  '■  , 

have  ceased;  that,  because  of  the  moratormms 
in  other  countries,  German  bankers  are  prevented  from 
drawing  on  foreign  balances;  that  German  funds  loaned 
to  foreigners  are  not  collectible;  that  the  Reichsbank  can- 
not part  with  its  gold;  and  that  the  unfavorable  rate  of 
exchange  is  no  index  of  economic  or  financial  conditions 
at  home.-  The  rate,  however,  is  a  matter  not  subject 
to  governmental  control.  In  Germany,  as  in  England,  it 
has  been  proposed  to  go  to  the  root  of  the  matter  by  lim- 

^  Business  in  Gennan  and  Austrian  exchange  at  New  York  was  in  fact  sus- 
pended after  March  28,  1917,  when  the  final  quotation  on  Berlin  was  69.50. 

-  Doctor  Helfferich  in  the  Reichstag,  March  10,  1915,  is  reported  to  have 
said:  "Foreigners  think  that  it'"  [the  fall  in  exchange]  "means  a  depreciation 
of  the  Reichsmark.  We  cannot  deny  that  we  have  to  pay  more  for  the  Swiss 
franc,  the  Dutch  guilder,  the  Scandinavian  cro^\-n,  and  the  American  dollar 
than  in  normal  times.  The  rise  of  the  foreign  rate  of  exchange,  in  my  opinion, 
is  in  no  way  connected  with  the  internal  strength  of  our  financial  position. 
It  depends  simply  upon  certain  technical  points  of  our  foreign  trade.  In  nor- 
mal times  Germany  can  pay  for  her  imports  by  her  exports  and  the  interest  on 
her  capital  invested  abroad.  It  is  now  impossible  to  collect  the  greater  part 
of  this  interest,  especially  on  the  large  investments  in  London.  We  are  im- 
porting raw  materials  and  food  which  in  normal  times  are  paid  for  in  cash  or 


I 


GERIVIAN  CREDIT  OPERATIONS         255 

iting  imports  to  indispensable  articles  and  by  stimulating 
the  exports  of  goods  not  needed  (as  potash,  for  example). 
In  Germany's  position  there  is  not  much  in  such  a  sugges- 
tion, because  it  is  not  hers  to  decide  in  the  main  what  she 
shall  export  or  import. 

The  experience  of  Germany  with  foreign  exchange  dif- 
fers, as  has  been  said,  from  that  of  England.  In  the  case 
of  the  former  gold  payments  were  abandoned  from  the 
beginning,  and  attempts  to  stabilize  the  unit 

p    .  .  1  ,  1  .,1  Effect  of 

01  mternational  payments  were  useless  witn-     depreciation 
out  considerable  shipments  of  gold.     The  no-    °n Exchange 
table  problem  of  the  German  rate  of  exchange 
is  its  relation  to  the  depreciation  of  the  bank-notes,  that 
is,  to  the  standard  of  prices.     Without  immediate  re- 
demption it  was  inevitable  that  the  notes  should  depre- 
ciate.    But  what  is  the  measure  of  the  depreciation  ?    Is 
it  correct  to  assume  that  the  rate  of  exchange  is  a  fair  in- 
dication of  the  depreciation  of  the  notes  ?''■     In  any  event, 
one  point  is  obvious.     A  buyer  of  German  exchange  in 
Amsterdam,  for  instance,  pays  Dutch  gold  for  a  claim  to 
paper  marks  in  Berlin.     The  purchased  bill  is  a  means  of 
paying  a  debt  in  Berlin;  but  how  much  should  he  give 
for  the  bill.^     If  he  were  to  bring  the  marks  to  Holland 
what  would  they  be  worth?     In  the  open  market  they 

short-time  bills,  while  the  greater  part  of  the  exports  are  manufactured  goods 
sold  on  long-time  book  credit.  The  machine  industry  has  large  sums  owning 
it  in  Russia.  Exports  have,  moreover,  suffered  more  than  imports,  and  the 
exports  are  concentrated  in  a  few  neutral  countries.  It  would  be  easier  if 
gold  could  be  exported.  But  we  are  of  the  opinion  that  the  keeping  of  a  gold 
resers^e  is  at  present  more  important  than  the  maintenance  of  the  German 
mark  abroad."     Cf.  M.  Chase  Going,  loc.  cit.,  p.  5i5. 

^  It  is  interesting  to  compare  the  German  situation  •with  that  during  the 
restriction  period  in  England,  1797-1821,  so  much  stressed  by  the  Bullion  Re- 
port, and  by  Ricardo.  In  the  theory  of  that  day  it  was  assumed  as  a  matter 
of  course  that  the  depreciation  of  the  notes  was  measm-ed  by  the  rate  of  foreign 
exchange,  or  by  the  quantity  of  notes  needed  to  buy  the  gold  coins  of  another 
country.     Cf.  Laughlin,  Principles  of  Honey,  chap.  VII,  §§  3,  i,  and  p.  25-i. 


^56  CREDIT  OF  THE  NATIONS 

were  at  a  heavy  discount.  That  is,  the  bill  would  be 
worth  no  more  than  the  value  of  the  money  in  which  they 
were  payable.  If  the  notes  have  depreciated,  bills  pay- 
able in  notes  will  depreciate  accordingly.  In  short,  bills 
are  affected  by  convertibility  in  the  same  way  as  paper 
money.  If  convertible  on  demand  into  gold  (i.  e.,  if 
shipping-points  exist  and  gold  moves  freely),  bills  will  re- 
main about  par;  if  not  payable  in  gold,  they  will  sell  at 
a  price  which  expresses  the  number  of  depreciated  notes 
needed  to  obtain  par  in  gold. 

The  pivotal  matter  in  this  case  is  the  disappearance  of 
the  shipping-points,  or  the  suspension  of  gold  payments 
in  respect  of  foreign  exchange.     The  fluctuations  of  the 

bills  can  no  longer  be  held  within  the  pre- 
Difference  scribed  limits  determined  by  the  expense  of 
German  and  moving  gold  to  and  fro.  It  is  exactly  like 
policy.^  the  failure  of  the  brakes  on  a  car  when  going 

down  a  steep  decline.  Here,  then,  is  the  one 
important  difference  between  the  policy  of  Germany  and 
that  of  England;  and  the  contrast  is  full  of  significance, 
not  only  to  an  understanding  of  the  exchanges,  but  also  to 
the  proper  means  of  conducting  the  operations  of  credit 
in  a  great  war. 

It  is  not  to  be  supposed,  however,  that  no  other  forces 
than  the  condition  of  the  currency  act  upon  the  price  of 
bills.     The  analysis  of  these  forces  was  given  in  the  study 

of  English  exchange.^  Of  the  five  forces  there 
affecting  enumerated,  the  shipment  of  gold  (4)  drops 

German  ^^^  £qj,  Germany,  and  the  depreciation  of  the 

currency  (5)  enters;  but  the  other  forces — the 
movement  of  goods  and  securities  (1),  the  payments  for 
interest,  freights,  etc.  (2),  and  the  creation  of  foreign 
credits  (3) — remain  in  operation,  but  only  in  a  much  re- 

»  Supra,  p.  125. 


GERMAN  CREDIT  OPERATIONS         257 

duced  state.  Yet  these  forces,  common  to  both  the  Ger- 
man and  EngHsh  experiences,  produce  widely  different 
practical  results,  accordingly  as  they  are  restricted  or 
not  by  the  movement  of  gold.  Of  course  Germany  can- 
not export  freely;  but  whether  she  does  or  not,  the  one 
thing  which  would  limit  the  fall  of  exchange  to  a  formal 
shipping-point  is  absent,  the  shipment  of  gold.  To  this 
absence  must  be  attributed  the  sensational  fall  in  Ger- 
man exchange,  and  not  to  the  disproportion  between 
exports  and  imports  of  goods.  Even  the  sending  of 
securities,  or  the  creation  of  credits  abroad,  is  able  to 
produce  little  effect  on  the  downward  course  of  exchange, 
when  the  brakes  are  not  working.  It  is  not  merely  a 
technical  question. 

It  is  to  be  noted,  of  course,  that  Germany  trades  only 
with  the  few  adjoining  neutrals,  and  not  with  her  ene- 
mies. If  it  be  supposed  that  the  rates  of  exchange  are 
determined  primarily  by  the  balance  between  the  exports 
and  imports  of  goods  and  securities,  then  the  price  of 
exchange  in  any  one  neutral  country  would  be  essentially 
a  question  of  the  balance  of  trade  between  Germany  and 
that  country  alone.  Yet  we  know  that  this  is  not  the 
fact.  There  is  much  the  same  depreciation  in  all  the 
neutral  centres.  The  rate  on  German  bills  in  Holland, 
for  instance,  depends  on  more  things  than  the  balance 
of  trade  between  the  two  countries.  The  controlling 
force  is  evidently  the  value  of  the  money  in  which  the 
bill  is  payable.  The  balance  of  trade  may  cause  fluctua- 
tions between  the  shipping-points.  When  they  disap- 
pear the  balance  of  trade  alone  is  not  the  controlling 
force. 

§  11.  In  financing  the  war,  Germany  furnishes  a  char- 
acteristic experiment  of  taxing  little  but  of  borrowing 


258  CREDIT  OF  THE  NATIONS 

much.  Her  credit  operations  in  placing  loans  on  a  very 
large  scale,  therefore,  have  especial  interest.  This  choice, 
to  be  sure,  in  favor  of  loans  as  against  taxation,  may  not 
have  been  entirely  voluntary.  Additional  taxes  on  top 
of  already  high  levies  may  not  have  been  politic;  but 
undoubtedly  it  was  long  expected  that  a  victorious  army 
would  enable  her  to  impose  indemnities  on  her  defeated 
enemies  heavy  enough  to  more  than  cover  the  expendi- 
tures of  war.  Whatever  the  reason,  the  necessary  outlay 
of  an  unexpectedly  long  and  expensive  war  was  too  large 
to  be  met  by  any  possible  taxation.  Borrowing  of  un- 
precedented sums  was  inevitable.  How  they  were  raised 
by  a  country  more  or  less  isolated  and  how  the  burden 
can  be  carried  are  pertinent  questions. 

The  public  debt  of  the  German  Empire  in  1913  was 
$1,194,000,000,  with  an  interest  charge  of  $58,000,000; 
in  addition  to  which  must  be  considered  that  of  the 

German  states,  amounting  to  $3,854,000,000, 
pubuc  debt  with  interest  charges  of  $170,000,000.  There 
before  the        were  municipal  debts  also.     The  outgo  in  the 

annual  budget  of  the  empire  was  in  round 
numbers  $880,000,000.  It  is  to  be  seen  that,  while  the 
imperial  debt  was  small  compared  with  that  of  other 
countries,  France  in  particular,  the  debt  of  the  German 
states  alone  was  larger  than  that  of  the  United  Kingdom. 
During  the  first  year  of  the  war  there  was  no  additional 
taxation.  In  the  beginning  the  first  needs  of  the  govern- 
ment were  met  by  the  presentation  of  imperial  treasury 

notes  to  the  Reichsbank  for  discount;  but  as 

First  Loan. 

early  as  August  4,  1914,  as  if  carefully  pre- 
pared beforehand,  a  large  war  credit  was  voted.  In  the 
First  Loan,  which  followed  the  credit  and  was  placed  in 
September,  1914,  treasury  notes  to  the  amount  of  $250,- 
000,000  were  authorized  due  October  1,  1920,  bearing  5 


GERMAN  CREDIT  OPERATIONS         259 

per  cent  interest,  and  also  an  unlimited  amount  of  im- 
perial 5  per  cent  bonds  not  convertible  within  ten  years. 
At  973^  subscriptions  were  made  to  the  total  of  $1,115,- 
000,000.  It  is  claimed  that  this  sum  was  raised  entirely 
at  home,  no  foreign  subscriptions  having  been  received. 
Of  the  receipts,  President  Havenstein  stated  that  less  than 
one-fifth  were  in  the  notes  of  the  loan  bureaus.  Although 
the  savings-banks  were  not  obliged  to  subscribe,  some 
$225,000,000  were  taken  by  them.  Bonds  were  issued  in 
denominations  as  low  as  $25,  and  depositors  were  urged 
to  invest  in  the  loan  as  a  patriotic  duty.  The  Krupps 
are  reported  to  have  taken  $7,500,000. 

Expenses  seem  then  to  have  been  running  about  $350,- 
000,000  per  month;  so  that  the  prolongation  of  the  war, 
rendered  inevitable  by  the  battle  of  the  Marne,  soon  de- 
manded another  loan.     This  was  put  out  in    ^ 

,.     .       ,  Second  Loan. 

March,  1915,  in  the  form  of  unhmited  trea- 
sury notes  due  October  1,  1922,  and  5  per  cent  imperial 
bonds,  as  before,  both  at  a  price  of  983^.  Instalments 
could  be  paid  within  four  months  until  August  20.  This 
offering  yielded  $2,265,000,000,  the  savings-banks  taking 
about  $495,000,000.  It  is  said  that  foreign  subscriptions 
amounted  to  perhaps  $30,000,000. 

The  Third  Loan,  solely  of  5  per  cent  imperial  bonds,  in 
September,   1915,  yielded    $3,025,000,000,    at      ^nirdLoan. 
a  price  of   99,    when    the  military   situation 
looked  favorable. 

In  the  Fourth  Loan,  after  the  second  winter  of  war, 
offered  in  March,  1916,  a  change  was  introduced  in  the 
way  of  41^  per  cent  treasury  notes,  at  95,  due  July  1, 
1932;  but  also  the  same  imperial  bonds  as  in  p^^^j^Lo^ 
former  loans  were  sold  at  983^.  Although  the 
number  of  subscribers  was  larger  than  in  any  previous 
loan,  the  amount  subscribed,  $2,678,000,000,  fell  below 


260  CREDIT  OF  THE  NATIONS 

the  last  loan.     There  were  2,406,118  subscribers  for  sums 
less  than  $50. 

The  Fifth  Loan,  coming  as  usual  in  the  autumn,  con- 
sisted of  43^2  per  cent  treasury  notes,  maturing  from  1923 
to  1932,  at  95,  and  the  familiar  imperial  5  per  cent  bonds 
at  98;  but,  while  the  amount  subscribed  was 

Fifth  Loan.         ^  ■,  ,«,.,-„ 

$2,675,000,000,  the  number  of  subscribers  fell 
off  more  than  a  million,  showing  that  the  loan  had  been 
raised  by  the  richer  persons  and  institutions. 

The  Sixth  Loan  offered  as  before  (1)  the  5  per  cent 
imperial  bonds,  not  redeemable  before  1924,  at  98.  But 
there  was  also  (2)  an  offer  of  new  treasury  bonds,  bearing 
interest  at  4}/^  per  cent,  at  98  (instead  of  95 
as  in  the  Fifth  Loan).  To  justify  the  price 
two  striking  features  were  introduced.  Beginning  in  Jan- 
uary, 1918,  by  drawings,  groups  of  bonds  drawn  would  be 
paid  off  at  110;  after  July  1,  1927,  holders  of  bonds  not 
yet  selected  could  convert  them  into  a  4  per  cent  bond, 
but,  if  chosen  at  a  second  drawing,  would  be  paid  off  at 
115.  By  1937  those  not  yet  taken  could  be  converted 
into  S}^  per  cents,  with  a  chance,  if  drawn,  of  repayment 
at  120.  In  1967  any  bonds  yet  out  would  be  redeemed 
by  the  government  either  at  110,  115,  or  120,  according 
to  their  fate  in  earlier  drawings.  By  a  second  feature, 
subscribers  were  allowed  to  convert  at  a  premium^  old 
treasury  bonds  and  old  war  loans  into  the  new  treasury 
bonds  to  double  the  amount  of  their  subscriptions,  if  cash 
were  paid  in.     It  will  be  interesting  to  note  that  only 

1  The  government  gave  a  cash'premium  of  1 J^  per  cent  for  5  per  cent  bonds 
of  the  First  Loan,  and  for  those  of  the  Second  3^  per  cent.  Or,  the  5  per 
cents  of  other  loans  could  be  converted  at  par  without  payment  by  either  side. 
But  the  holder  of  4}^  per  cent  treasury  bonds  of  the  Fourth  and  Fifth  Loans 
must  himself  pay  3  per  cent  if  converted.  If  drawn  in  1922  and  paid  ofiF  at 
110,  the  rate  of  interest  would  be  63^  per  cent.  The  lowest  denominations 
were  $250. 


GERMAN  CREDIT  OPERATIONS         261 

about  one-tenth  of  the  whole  subscriptions  were  for  the 
new  43^  per  cents.  For  both  forms  of  the  Sixth  Loan 
the  hsts  were  opened  March  15,  and  closed  April  16, 
1917;  while  the  payments  by  instalments  ran  to  the  mid- 
dle of  July. 

One  significant  admission  of  bankruptcy  in  this  loan 
should  be  given  full  notice.  Out  of  the  nominal  value 
of  the  original  43^  per  cent  bonds  subscribed  for,  the 
government  specified  that  5  per  cent  should  be  devoted 
to  the  expense  of  the  drawings  and  the  payment  of  inter- 
est. Paying  interest  out  of  the  principal  is  not  usually 
regarded  as  an  evidence  of  solvency. 

Early  in  1915  about  $10,000,000  of  imperial  treasury 
notes  were  disposed  of  in  the  United  States.  Wlien  they 
matured  in  January,  1916,  they  were  paid  off.  In  April 
of  that  year  a  similar  issue  was  offered,  but  only  $1,000,- 
000  were  paid  off  when  they  fell  due  in  April,  1917,  the 
remainder  being  continued  at  6  per  cent  (the  interest 
being  paid  in  advance).  Many  of  these  notes  remained 
in  the  hands  of  our  banks  undisposed  of,  until  the  banks, 
on  fear  of  war  with  the  United  States,  insisted  on  pay- 
ment. This  seems  to  have  been  the  only  external  loan 
made  by  Germany.  Of  the  second  imperial  loan  floated 
in  Germany  it  is  reported  that  perhaps  $30,000,000,  as  al- 
ready said,  were  taken  abroad.  All  told,  it  is  believed 
that  some  $25,000,000  of  German  bonds  were  bought  in 
the  United  States,  and  perhaps  an  equal  amount  in  neu- 
tral countries. 

The  funded  debt,  of  course,  lags  far  behind  actual  ex- 
penditure. After  the  Sixth  Loan  the  imperial  funded  debt 
was  about  $15,000,000,000,  but  additional  expenditure 
had  been  incurred  to  the  end  of  July,  1917.^  The  total 
credits  voted  by  February,  1917,  had  been  about  $20,000,- 

1  From  February,  1917,  the  monthly  expenditure  had  been  $750,000,000. 


CREDIT  OF  THE  NATIONS 


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GERMAN  CREDIT  OPERATIONS         263 

000,000,  but  at  that  date  Count  von  Rodern  estimated 
the  war  expenditure  at  $25,000,000,000.^  To  the  funded 
debt  there  should  be  added  for  various  expenditures  in 
order  to  arrive  at  the  total  imperial  war  debt  by  the 
end  of  the  third  year  of  the  war,  at  least  $5,000,000,000. 
Therefore,  in  trying  to  ascertain  the  total  burden  of  im- 
perial indebtedness  for  three  years,  the  following  may  be 
set  down  as  the  approximate  result  (in  millions) : 

Funded  debt,  including  Sixth  Loan $15,000 

Additional  expenditure  to  August,  1917 5,000 

Floating  debt,  treasury  bills,^  etc 2,000 

Pre-war  debt 1,200 


$23,200 


To  find  the  full  weight  of  debt  to  be  carried  by  the 
German   people,    there   should   be   added   the   debts   of 
the  various  states  and  municipalities.     Before  the  war 
the  states  had  a  debt  of  $3,854,000,000,  which 
must  have  been  seriously  increased  during  the    '^9^^  burden 

•^  o  of  German 

war.     They  have  since  borrowed  largely  from    debt  at  end 
the  loan  bureaus.     The  municipalities  also  are    years"* 
deeply  involved.     For  instance,  eight  Saxon 
cities  had  incurred  a  war  debt  of  over  $64,000,000  by  the 

^  The  imperial  war  credits  voted  have  been  as  follows  (in  millions) : 

August         1,1914 $1,250        June  7,1916 $3,000 

December    2,1914 1,250         October     27,1916 3,000 

March        20,1915 2,500         February  24,  1917 3,750 

August      20,  1915 2,500        July,  1917 3,750 

December  21,  1915 2,500  

Total $23,500 

Since  Count  von  Rodem,  minister  of  finance,  is  reported  to  have  said  in  Feb- 
ruary, 1917,  that  the  war  expenditure  of  Germany  to  that  date  had  been  $25,- 
000,000,000,  the  estimate  in  the  text  of  $23,200,000,000  as  the  total  debt  at  the 
end  of  three  years  must  be  overconservative. 

^  This  figure  for  treasury  bills  is  perhaps  too  conservative.  The  London 
Economist  (September  22,  1917.  p.  423)  estimates  the  total  amount  of  treasury 
bills  outstanding  to  be  over  $5,500,000,000.  If  so,  they  may  be  partly  included 
in  the  estimate  of  additional  expenditure  to  August,  1917. 


264  CREDIT  OF  THE  NATIONS 

end  of  1916;  while  one  town  of  30,000  people  near  the 
Rhine  had  alone  borrowed  $625,000.  The  obligations  for 
pensions,  relief  to  families,  etc.,  must  be  heavy.  It  would 
be  a  very  conservative  estimate  to  add  to  the  imperial 
debt  as  stated  above  $7,000,000,000  of  other  debt.  There- 
fore, had  the  war  ended  in  August,  1917,  the  German  peo- 
ple as  a  body  would  have  faced  a  burden  of  at  least  $30,- 
000,000,000  of  debt,  the  interest  charge  on  which  at  5 
per  cent  would  be  $1,500,000,000  a  year,  independent  of 
normal  budgetary  demands,  which  before  the  war  were 
$880,000,000. 

It  is  to  be  remembered  that  the  loan  bureaus  {Dar- 

lehnskassen)  had  as  one  of  their  chief  objects  to  aid  in 

placing  loans  to  the  government.     They  were  intended 

to  relieve  the  Reichsbank  from  requests  for 

Notes  of  loans  on  securities   (a  part  of  the  Lombard 

loan  bureaus  ,  e 

based  on  this  busiucss) .  The  sourcc  of  danger  to  credit 
debt."  ^  from  the  new  bureaus  was  the  possibility  of 

creating  demand  liabilities  in  their  note-issues 
(Darlehnskassenscheine)  against  unliquid  assets.  Since  the 
stock  exchange  was  closed,  securities  were  unsalable,  and 
yet  it  was  precisely  this  class  of  obligations  which  the 
loan  bureaus  were  expected  to  accept  as  a  basis  for  loans. 
Had  the  war  been  a  short  one,  with  a  quick  rebound  of 
peace  and  prosperity,  income  and  earning  power  might 
have  given  these  securities  a  fresh  life  and  value;  and  the 
assets  behind  the  notes  of  the  loan  bureaus  might  have 
become  quick,  and  furnished  the  means  of  liquidation 
through  ready  sale  at  home  or  abroad.  As  the  war,  how- 
ever, has  lengthened  out,  and  as  the  debts  of  the  empire, 
the  states,  and  the  municipalities  (whose  securities  are 
some  of  those  on  which  loans  were  made)  have  increased 
beyond  all  expectations,  the  liquidity  of  these  assets,  as 
well  as  the  securities  of  many  industrial  concerns  (except 


GERMAN  CREDIT  OPERATIONS         265 

war  companies),  has  become  less  and  less  certain.  It 
is  not  so  much  the  quantity  of  these  note-issues  as  the 
soundness  of  the  assets  behind  them  which  determines 
their  vulnerability.^  There  is  dangerous  inflation,  if  de- 
mand liabilities  are  built  up  in  undue  proportions  to  the 
body  of  salable  and  quick  assets  behind  them.  The  ques- 
tion is  therefore  raised  whether  the  loan  bureaus  have 
aided  in  inflation  when  coining  unsalable  securities,  or 
even  salable  ones,  into  a  form  of  money  which  made  it 
accessible  to  any  one  wishing  to  subscribe  to  a  war  loan. 
In  reply  it  is  stated  that  only  17.4  per  cent  of  the  sub- 
scriptions to  the  First  Loan  were  paid  for  with  notes  of 
the  loan  bureaus;  5.7  per  cent  of  the  Second  Loan;  6.4 
per  cent  of  the  Third  Loan;  and  about  6  per  cent  of  the 
others.  However  this  may  be,  we  know  that  these 
bureaus  have  issued  over  $1,200,000,000  notes,  and  that 
the  assets  behind  them  are  securities  unsupported  by 
any  cash  reserves.  Are  these  assets  capable  of  protect- 
ing demand  notes  ^  circulating  in  the  hands  of  the  public  ? 
When  we  face  the  fact  that  the  German  people  have 
incurred  a  war  debt  in  three  years  which  is  more  than 
one-third  of  the  whole  wealth  of  the  country  (as  estimated 
by  Helfferich  before  the  war),  there  is  reason 
to  examine  the  legitimate  basis  behind  the  tw^CTedit 
credit  of  the  state,  and  the  methods  used  to 
place  the  loans.  Of  course,  the  amount  of  money  in  cir- 
culation, the  ease  in  getting  it  by  loans,  is  only  a  super- 

^One  apologist  (M.  J.  Bonn,  German  War  Finance,  pp.  11,  12)  speaks  of 
these  banks  as  conservative  in  lending  "on  perfectly  good  securities  which  they 
could  not  sell,  as  the  stock  exchange  was  closed,  and  which,  in  any  case,  they 
could  have  sold  only  at  a  loss."  It  would  be  difScult  to  frame  a  better  defini- 
tion than  in  these  words  for  unsound  assets,  especially  for  banks  issuing  notes 
payable  on  demand  to  the  amount  of  $1,200,000,000,  without  any  cash  reserves. 

2  The  notes,  it  should  be  said,  are  secured  by  the  unlimited  personal  liability 
of  the  borrower,  by  the  value  of  the  pledged  collateral,  and  by  the  guarantee  of 
the  government. 


266  CREDIT  OF  THE  NATIONS 

ficial  part  of  the  whole  matter.  The  bookkeeping  of  the 
case  may  not  be  more  than  a  means  of  putting  a  good 
face  on  the  situation.  The  fundamental  elements  must 
always  be  the  production  and  sale  of  goods,  by  which 
all  credit  and  all  final  liquidation  of  obligations,  pub- 
lic or  private,  must  be  sooner  or  later  met.  It  is  per- 
fectly clear  that  the  present  production  and  exchange  of 
goods  (apart  from  war  supplies)  has  undergone  drastic 
reduction,  while  the  credit  obligations  supposed  to  rest 
on  this  production  have  increased  enormously.  These 
credit  operations  are  increasing  on  a  declining  value  of 
assets.  It  is  impossible  that  there  could  be  present  liqui- 
dation if  it  were  demanded ;  hence  there  can  be  no  present 
solvency.  It  is  no  proof  of  solvency  to  increase  the  num- 
ber of  monetary  claims  against  a  declining  volume  of 
assets,  and  so  enable  transactions  to  be  settled  in  "cash." 
The  only  thing  accomplished  is  to  keep  up  appearances  to- 
day by  going  through  the  forms  of  solvency,  and  thereby 

postpone  to  the  future  by  credit  the  final 
of  credit  tcsts  of  liquidation.     At  present  the  devices 

at  loan  f^j.  "j^Q^plug  yp  appearances  in  placing  loans 

are  not  impenetrable.  The  loan  bureaus  un- 
doubtedly admit  the  pyramiding  of  credits  upon  obliga- 
tions which  may  be  unsubstantial.^  The  process  can  go 
on  indefinitely,  so  long  as  the  unlimited  power  of  the  gov- 
ernment can  prevent  the  usual  tests  of  solvency  known 

*  Internal  evidence  as  to  the  methods  of  floating  the  huge  German  loans  is 
provided  in  an  extract  from  the  Kblnische  Zeitung  of  September  2,  1915  (quoted 
in  New  York  Nation,  March  8,  1917,  p.  285): 

"It  is  not  necessary  that  one  should  have  actual  gold  or  silver,  and  any  one 
possessing  anything  can  participate  whether  he  has  ready  cash  or  not.  .  .  . 
If  you  hold  securities  ...  it  is  not  necessary  to  sell  them;  you  simply  borrow 
money  against  them  at  any  ReicksbanJc-Darlehnskasse,  or  at  any  large  bank,  and 
as  you  will  receive  almost  as  much  interest  on  the  war-loan  stock,  or  even  more 
interest  than  you  pay  to  the  lending  bank,  you  will  be  nothing  out  of  pocket. 
...  If  you  have  already  subscribed  to  the  First  or  Second  War  Loan,  and  paid 
in  full  for  the  same,  you  can  at  once  participate  in  the  present  issue.     All  you 


GERMAN  CREDIT  OPERATIONS         267 

to  the  outside  world.  Thus  the  isolation  of  Germany, 
and  the  floating  of  loans  entirely  among  a  people  subject 
to  absolutism — to  whom  it  is  within  the  power  of  the 
government  to  indicate  what  shall  be  the  tests  of  liquida- 
tion, even  to  taking  away  existing  control  over  property, 
if  military  necessity  requires  it — permit  operations  which 
would  not  stand  for  a  moment  if  submitted  to  the  rules  of 
business  demanded  by  those  in  other  countries  outside  of 
German  control. 

It  has  been  said,  in  explanation  of  the  easy  placing  of 
enormous  war  loans,  that  the  capital  formerly  engaged 
in  foreign  trade,  and  now  released,  is  free  to  be  loaned 
to  the  government.     It  is  not  shown,  however, 

°  .  ,  '  '         Where  war 

that  such  capital  is  transferable.     That  em-      loans  come 
ployed  in  shipping  is  obviously  locked  up  and       ™™' 
earns  nothing;  and  that  used  in  producing  articles  for 
export,  if  not  in  fixed  form,  has  been  probably  shifted 
to  making  war  supplies. 

When  it  is  added  that  there  have  been  no  new  flota- 
tions to  absorb  accumulating  capital,  it  is  Intimated  that 
savings  are  going  on  at  a  rapid  rate  and  that  they  can 
take  up  war  loans  accordingly  on  a  great  _  . 
scale.  So  far  as  the  statistics  of  savings-banks  measure  of 
can  be  relied  on,  it  would  seem  that,  even  in 
war  times,  the  spirit  of  thrift  has  been  amazingly  stimu- 
lated.^   Nevertheless,  the  savings-banks  could  have  taken 

need  to  do  is  to  take  your  stock — or,  if  you  have  not  yet  received  the  stock,  the 
receipt  for  the  amount  paid — to  a  bank,  which  will  advance  you  75  per  cent  of 
the  nominal  value,  so  that  if  you  have  400  marks  of  the  old  war  loan  you  can 
subscribe  300  marks  in  the  new  issue  without  paying  a  single  pfennig.  You 
can  even  subscribe  four  times  this  amount,  i.  e.,  1,200  marks,  if  you  also  leave 
with  the  bank  the  stock  that  you  take  in  the  new  loan,  in  which  case  you  will 
have  given  the  bank  as  security  400  marks  of  the  old  war  loan  and  1,200  marks 
of  the  new  war  loan,  together  1,600  marks,  against  a  loan  of  1,200  marks." 

*  In  1916  the  deposits  in  savings-banks  were  said  to  have  reached  $5,000,000,- 
000,  and  by  the  middle  of  1917  to  have  added  $625,000,000  more.  M.  J.  Bonn. 
ibid.,  p.  16.  In  March,  1916.  HelfiFerich  stated  that  $1,125,000,000  had  been 
withdrawn  from  the  savings-banks  to  be  invested  in  war  loans. 


268  CREDIT  OF  THE   NATIONS 

but  a  fraction  of  the  war  loans.  The  largest  subscriptions 
have  come  through  the  banks  for  their  customers.  In  gen- 
eral, the  war  debt  represents  the  amount  of  past  wealth 
(to  which  labor  and  capital  were  contributory)  which  is 
now  consumed  and,  when  the  surplus  of  goods  above  the 
necessaries  of  life  (arising  out  of  the  country's  total  pro- 
ductive eflBciency)  is  used  up  in  war,  additional  debt  is  no 
longer  based  on  goods,  but  becomes  merely  an  unsub- 
stantial promise,  based  on  future  production,  whose 
worth  is  problematical.  If  the  debt  is  already  over  one- 
third  of  the  total  wealth  of  the  country,  it  implies  that 
at  least  one-third  of  that  wealth  has  been  consumed  in 
war. 

When   the   German   savings-banks,   whose   funds   are 
largely  placed  in  fixed  investments,  or  real  estate,  sub- 
scribe in  large  amounts  to  war  loans,   what  goes  on.?* 
Their   investments   are   pledged   to   the  loan 
f.flwo°^         bureaus,  in  return  for  note-issues  with  which 

savings.  ' 

payment  is  made  to  the  Treasury  for  war 
bonds.  The  government  pays  out  these  notes  for  its 
expenses  to  Germans.  The  public  possess  a  circulation, 
to  that  extent,  based  on  savings-bank  (not  commercial 
bank)  assets,  probably  in  the  main  real  estate.  Au  fond, 
how  different  is  this  money  from  the  French  assignats  of 
unfragrant  memory.'* 

The  German  loan  operations  are  obviously  connected 
with  the  expansion  of  discounts,  and  with  the  steadily  ris- 
ing inflation  of  credits  as  shown  in  the  accounts  of  the 

Reichsbank  (see  Chart  V).  On  the  placing 
caused  of  cach  loau  the  discounts  show  a  sharp  rise; 

mcreased         j-^^^  ^j^g  borrowing  at  times  of  subscription  is 

discounts.  °  1        •  1  1 

more  strongly  accentuated  with  each  succes- 
sive loan,  that  of  the  Sixth  Loan  showing  an  unprece- 
dented use  of  discounts.     In  short,  the  resorts  to  credit 


GERMAN   CREDIT  OPERATIONS  269 

rise  higher  than  should  follow  upon  a  steadily  rising  ex- 
pansion of  credit.  These  events  at  the  Reichsbank  are 
undoubtedly  typical  of  conditions  at  other  German  banks. 
The  whole  movement  of  credit  operations,  however,  stands 
out  in  bold  contrast  to  that  of  the  Bank  of  England  (in 
Chart  II).  The  steadiness  of  English  discounts  since 
October,  1915,  and  their  low  range  as  compared  with 
those  of  the  Reichsbank  (being  only  about  one-fifth  as 
high)  is  striking  and  significant  of  the  English  as  con- 
trasted with  the  German  system  of  credit.  England  does 
not  borrow  of  its  bank,  and  hence  war  loans  do  not  upset 
the  system  of  credit  nor  the  currency. 

The  relation  of  treasury  notes  to  the  placing  of  loans 
is  to  be  noted.  The  notes  are  taken  in  large  amounts 
by  all  the  banks.  Before  a  new  loan,  when  government 
funds  are  running  low,  the  banks  are  working  to  increase 
deposits  likely  to  be  used  in  subscriptions  for  the  new 
loan.  Such  temporary  funds  are  invested  for  a  time  in 
treasury  notes  and  later  exchanged  for  bonds.  When 
the  government  receives  instalments  on  the  new  loan, 
it  can  then  retire  the  treasury  notes.  Thus,  like  ex- 
chequer bonds,  they  are  used  to  anticipate  coming  re- 
ceipts. 

As  few  persons  understand  the  intricacies  of  public 
finance,  it  is  explicable  why  German  authorities,  in  order 
to  remove  doubts,  should  have  offered  an  explanation  to 
show  that  the  enforced  isolation  of  Germany 

J    i_       iT.  •  J         4-  •       I,  Supposed 

caused  by  the  war  is  an  advantage  m  her  advantage  of 
financing  of  the  war  costs.  It  is  regarded  to  Jt^homl*^^^* 
be  an  advantage  that  her  loans  are  placed  with 
her  own  people;  that  the  proceeds  are  spent  at  home;  that 
all  savings  go  into  the  national  enterprise  of  war;  that  the 
economic  strain  of  providing  goods  for  export  is  absent; 
hence  that  the  naval  blockade  of  German  ports  has  been  a 


270  CREDIT  OF  THE  NATIONS 

blessing.^  The  argument  seems  to  assume  that  foreign 
trade  has  In  it  no  gains;  that  the  destruction  of  wealth 
and  capital  in  war  is  desirable  the  more  it  is  confined 
to  the  German  people.  On  this  theory,  a  man  who  has 
lost  an  arm  should  congratulate  himself  on  escaping  the 
fatigue  he  might  feel  in  using  it.  The  loans  are  evidence 
of  destruction  in  war  which  fall  upon  her  own  people;  the 
reservoir  of  her  goods  has  been  drawn  down,  and  no  other 
country  has  helped  her  to  supply  the  deficit;  in  the  future 
her  own  people  must  deprive  themselves  of  former  satis- 
factions in  order  to  pay  the  interest  and  possibly  some 
of  the  principal  of  the  debt;  the  lack  of  foreign  credits 
has  cut  her  off  from  present  goods  which  she  must  sup- 
ply by  her  own  industrial  efficiency ;  and  if  the  whole  popu- 
lation work  harder  and  show  greater  efficiency  than  ever 
before,  it  brings  no  progress,  because  it  is  used  up  in  com- 
pensating for  war  losses.  No  casuistry  can  save  any 
people  at  war  from  the  grim  necessity  of  paying  sooner 
or  later  for  what  has  been  destroyed.  To  carry  the  bur- 
den herself  does  not  lighten  it,  nor  does  it  avoid  the  sweat 
and  toil  of  the  exertion. 

To  a  country  whose  absolute  government  gives  it  pos- 
sibilities of  taking  great  liberties  after  the  war  with  the 
property  and  income  of  its  subjects — which  could  not 

be  exercised  over  foreign  owners  of  its  securi- 
sWfts^^o  ^^^^ — ^^^  holding  of  its  debt  at  home  presents 

escape  debt  what  may,  in  the  German  political  code  of 
^aj.  morals,  be  called  advantages.     The  socialistic 

absolutism  of  Germany  goes  so  far  as  to  make 
all  wealth  almost  common  property  to  be  taken  at  will 
for  national  purposes.     Without  using  the  term  confisca- 

'  C/.  M.  J.  Bonn,  ibid.,  pp.  14-17,  35-36.  He  adds:  "German  finance  is 
merely  a  German  problem.  When  the  war  is  over  the  German  people  will  not 
be  indebted  to  foreign  nations.  They  will  not  have  to  send  abroad  a  large 
share  of  their  annual  produce  in  payment  of  their  war  debt." 


GERMAN   CREDIT  OPERATIONS  271 

tion,  it  might  be  possible,  without  the  consent  of  security- 
holders and  without  the  alternative  of  being  paid  off,  to 
lower  the  rate  of  interest  on  imperial  bonds.  Such 
methods  could  not  be  applied  to  foreign  holders.  But  a 
more  extreme  supposition  may  not  be  visionary.  If  the 
debt  increases  much  more,  when  peace  comes  it  might 
plausibly  be  said  that  the  people  have  already  paid  for 
the  cost  of  the  war  in  the  diminished  consumption  and 
sacrifices  during  its  continuance,  and  that  the  taxation 
to  pay  the  interest  and  principal  of  the  debt  in  the  future 
would  necessitate  such  heavy  taxation  that  the  sacrifices 
would  really  have  to  be  undergone  a  second  time;  that 
this  heavy  taxation  could  not  fall  on  the  poor,  for  they 
have  little  to  be  taxed;  that  the  burden  of  taxation  must 
fall  on  the  rich,  who,  after  all,  are  the  very  ones  who 
hold  the  war  bonds;  that  this  slow  way  of  removing  the 
debt  by  taxation  only  takes  from  the  rich  to  pay  the 
rich.  Therefore,  why  not  accomplish  the  same  thing  at 
one  stroke  by  asking  the  owners  of  imperial  bonds,  as  a 
patriotic  duty,  to  present  their  securities  to  the  nation; 
avoid  the  inevitable  taxation,  which  in  the  end  would 
take  away  probably  as  great  a  sum;  and  with  a  clean 
slate  start  life  anew  ?  Millions  of  lives  have  been  given 
to  their  country;  why  not  induce  others  to  give  millions, 
or  billions,  of  the  war  loan,  to  the  same  purpose  ?  Since 
such  a  suggestion  would  be  out  of  the  question  to  foreign 
investors  in  German  bonds,  it  may  possibly  explain  why 
the  financing  of  the  war  at  home  may  prove  to  be  an 
"advantage"  after  the  war.  The  redistribution  of 
wealth,  however,  caused  thereby  may  be  too  great  a 
moral  disadvantage  in  the  eyes  of  foreigners,  with  whom 
trade  must  be  carried  on  in  the  future,  to  warrant  such 
a  blow  to  the  credit  of  Germany. 

Evidently  no   German  financier  even  dreamed  of  a 


272 


CREDIT  OF  THE  NATIONS 


Taxation. 


war  debt  of  such  staggering  figures.  It  was  believed  to 
be  a  matter  of  course  that  indemnities  would  be  levied 
upon  the  defeated  Allies;  and  the  insistence 
upon  annexations  and  commercial  concessions 
is  even  yet  a  part  of  stubborn  demands  named  in  the 
terms  of  peace  by  the  ruling  element.  Such  confidence 
in  victory  was  the  basis  of  the  financial  policy  of  the 
empire  by  which  no  taxation  was  to  be  levied,  while  the 
actual  expenditure  for  war  was  to  be  met  by  loans,  soon 
to  be  paid  off  from  indemnities.  The  fortunes  of  war 
entirely  disarranged  this  scheme.  Having  once  started 
by  borrowing,  the  path  ran  down-hill.  The  only  brake 
of  taxation  was  hesitatingly  and  mildly  applied.  During 
the  first  year  of  war  no  new  taxes  were  laid.^  By  the 
time  the  Third  War  Loan  was  offered,  in  1915,  Helfferich 
announced  that  it  was  not  the  policy  of  the  government 
to  increase  the  burden  of  taxation  on  the  generation  that 
had  nobly  given  their  lives,  but  by  loans  to  throw  the 
burden  on  future  generations  who  would  have  profited 
by  the  sacrifices  of  to-day.  Later,  however,  it  became 
evident  that  income  was  not  sufficient  to  meet  the  normal 
budget  and  also  pay  interest  on  a  rapidly  mounting  debt. 


'  The  normal  revenues  of  the  German 
millions  of  dollars): 

1 .  Post  and  telegraph $208 . 4 

2.  Printing-office 3.9 

3.  Railroads 39.9 

4.  Various  admin,  receipts. ...     22.9 

5.  Taxation: 

Customs 169.8 

Tobacco 2.8 

Cigarettes 10.6 


Sugar. 

Salt 

Spirits.  . 
Vinegar. 
Wine . . . 


48.4 
15.5 

48.3 

.2 

2.3 


Empire  in  1913  were  as  follows  (in 

Lamps  and  bulbs $3.7 

Matches 5.0 

Beer 32.5 

Cards .5 

Stamp  tax  on  bills 4.9 

Stamps  (general) 58.7 

Increment  tax 3.8 

Inheritance 11.6 

Mi.scellaneous .5 

6.  Contributions  for  defense.  .2 

7.  Contributions     from     the 

.states 12.9 

8.  Miscellaneous 95.7 


CJ.  Seligman,  War  Finance  Primer,  p.  123. 


Total $803.0 


GERMAN  CREDIT  OPERATIONS  273 

Moreover,  it  is  to  be  remembered  that  Germany  has 
rehed  more  than  other  countries  upon  protective  duties, 
which  the  blockade  largely  cut  off,^  The  imperial  gov- 
ernment had  retained  the  field  of  indirect  taxation,  while 
the  several  states  relied  mainly  on  direct  taxation.  Con- 
sequently imperial  receipts  fell  off  as  expenditures  in- 
creased. In  March,  1916,  Helfferich  reported  a  deficit 
in  the  ordinary  budget  (excluding  war  matters)  of  $120,- 
000,000.  Then  he  was  forced  to  announce  that  they 
could  not  go  on  indefinitely  "without  being 

,.     ,    ^     ,  P  Deficits. 

compelled  to  have  recourse  to  new  sources  oi 
revenue."  Details  of  the  fiscal  operations  after  1914 
are  not  available.  We  know,  however,  that  new  taxes 
were  imposed,  yielding  about  $125,000,000,^  and  in  addi- 
tion there  were  taxes  on  war  profits.  So  far  as  can  be  as- 
certained, the  new  taxes  could  not  have  been  sufficient  to 
meet  the  charges  on  the  increasing  war  debt,  for  in  plac- 
ing the  Sixth  Loan  a  part  of  the  principal,  as  already 
noted,  was  set  apart  for  the  payment  of  interest.  To 
pay  interest  from  the  proceeds  of  new  loans  is  obviously  to 
be  regarded  as  an  evidence  of  fiscal  weakness. 

How  long  can  Germany  go  on  building  up  an  enormous 
debt,  now  increasing  at  the  rate  of  $750,000,000  per 

'In  1912  England  received  from  customs  duties  $168,000,000,  Germany 
$164,000,000,  and  France,  $132,000,000.  From  protective  duties,  15.4  per 
cent  of  total  revenue  was  obtained  by  Germany,  as  against  9.9  by  France,  and 
0.4  by  England.     Ibid.,  p.  107. 

^  It  is  reported  that  the  new  taxes  were  increases  on  postal,  telegraph,  and 
telephone  charges;  on  bills  of  lading;  a  new  tax  on  business  profits;  a  non- 
recurring tax  per  mill  on  all  property  above  $5,000;  and  a  special  tax  on  in- 
creases in  real-estate  value  exceeding  $750  a  year. 

In  February,  1917,  Count  von  Rodern  proposed  other  taxes  of  2}/2  marks 
on  coal,  and  a  levy  of  10  to  16  per  cent  on  railroad  tickets,  and  7  per  cent  on 
all  freights. 

He  also  announced  that  the  annual  (normal)  budgets  had  been  published  as 
usual  during  the  war,  but  that  the  expenditures  of  the  army  and  navy  did  not 
appear  in  them.  The  maximum  of  these  expenditures,  he  naively  added,  could 
be  ascertained  by  the  total  of  war  credits  voted.     Cf.  p.  263,  n.  1. 


274  CREDIT  OF  THE   NATIONS 

month,  or  $9,000,000,000  a  year?  Much  attention  has 
been  given  to  an  earlier  statement  by  President  Haven- 
stein  of  the  Reichsbank  that  the  end  would  come  when 
the  debt  had  reached  $25,000,000,000,  since  the  interest 
charge  would  then  be  all  that  the  people  could  carry 
besides  the  normal  expenses  of  the  state.  That  has 
already  been  reached,  and  the  end  is  not  in  sight.  What 
must  be  the  outcome? 

It  is  sometimes  supposed  that  the  war  must  come  to 
an  end  because  of  economic  exhaustion.  But  what  is 
economic  exhaustion  in  this  sense  ?     If  a  railway  becomes 

bankrupt,  why  can  it  continue  in  operation 
economic  Under  a  receiver?  Evidently  because  it  can 
end^ttfe^war?    ^^  ^^'  ^^P^S  ^^r  better  times,  as  long  as  it 

can  pay  running  expenses  and  no  more. 
Similarly,  Germany,  even  if  insolvent,  can  go  on  fighting 
so  long  as  she  can  provide  munitions  and  men,  with  the 
necessaries  of  life  at  least  for  the  fighters.  She  can 
turn  all  her  surplus  wealth  by  forms  of  credit  into  means 
of  payment,  subscribe  for  loans,  and  thus  transfer  the 
whole  wealth  of  the  nation  to  the  government  to  be 
used  up  in  war.  Only  in  this  way  can  we  account  for 
the  floating  of  such  enormous  loans.  They  now  exceed 
one-third  the  national  wealth.  But  that  fact  will  not 
stop  the  war  for  economic  reasons,  unless  that  outlay 
is  increased  to  a  point  which  is  admitted  to  equal  the 
whole  surplus  of  the  country's  wealth  over  the  minimum 
of  existence  for  all.  It  is  not  fully  realized  how  vast  is 
the  excess  of  modern  production,  due  to  invention,  new 
power,  and  machinery,  over  the  bare  necessities  of  life. 
All  of  this  could  be  given  up  before  economic  exhaustion 
would  stop  the  war.  Only  the  primary  needs — those  for 
healthful  food,  clothing,  and  shelter — must  be  satisfied 
to  maintain  physical  energy.     We  cannot  tell  whether 


GERIVIAN   CREDIT  OPERATIONS  275 

Germany  has  been  reduced  to  these  minima,  or  not. 
Building  has  largely  ceased,  but  existing  housing  is  un- 
doubtedly ample.  Clothing  can  be  economized,  if  fashion 
be  not  observed.  As  to  food,  it  is  not  easy  to  get  reliable 
data.  Although  many  foodstuffs  are  scarce,  possibly  a 
minimum  for  all  may  be  provided,  if  it  is  successfully 
distributed.  Probably  the  poorer  classes  are  suffering 
great  hardships,  because  no  organization  can  be  every- 
where equitable  and  efficient.  But  grant  that  starvation 
can  be  prevented.  So  far  as  economic  reasons  are  con- 
cerned, then,  the  war  can  go  on  as  long  as  munitions  can 
be  supplied,  and  until  the  German  army  is  worn  down  by 
attrition  to  numbers  that  cannot  protect  the  military  lines. 
It  is  doubtful  if  much  light  would  be  thrown  upon  the 
question  by  the  usual  consideration  of  the  figures  of  debt, 
and  national  wealth  or  national  income.  The  contrast 
is  often  made  between  the  heavy  annual  ^^  ^ 
charge  for  the  debt,  added  to  normal  budget  income  no 
expenditure,  with  the  national  income  to  show 
that  the  burden  is  getting  too  heavy  to  be  carried.  Helf- 
ferich,  in  1913,  made  out  the  total  national  income  of 
Germany  to  be  $10,000,000,000,  of  which  about  $2,000,- 
000,000  may  be  regarded  as  net  annual  income.  Against 
this  is  a  charge  already  for  debt  alone,  at  5  per  cent,  of 
$1,500,000,000,  and  a  budget  of  over  $800,000,000  be- 
sides, thus  taking  up  more  than  the  net  income  in  time 
of  peace.  Also,  he  estimates  the  national  wealth  at  $75,- 
000,000,000,  with  which  a  total  debt  on  the  German 
people  of  over  $30,000,000,000  is  to  be  compared.  Such 
comparisons  for  the  purpose  of  estimating  the  duration  of 
the  war  are  mechanical.  They  convey  little  as  to  the 
psychological  situation.  The  Germans  can  go  on  fighting 
longer  if  they  are  willing  to  sacrifice  all  their  wealth,  and 
retain  only  the  bare  necessities  of  life.     All  depends  on 


276  CREDIT  OF   THE  NATIONS 

the  spirit  to  sacrifice.  The  burden  of  debt  is  significant 
only  as  it  affects  the  will  to  continue.  The  ruling  class 
are  expert  in  tempering  the  purpose  of  the  people  to  any 
plan  they  have  in  mind. 

The  decision,  therefore,  is  largely  dependent  on  a  po- 
litical or  psychological  quality.  Will  the  German  people 
support  the  war  policy  of  their  rulers,  in  spite  of  the 
increasing  slaughter  of  fathers  and  sons,  to  the 
the  war  a  poiut  of  denying  themselves  all  habitual  con- 
psychoiogicai    sumptiou  dowu  to  the  minimum  of  existence.'* 

question.  ^ 

Or  may  not  the  ever-present  pressure  of  de- 
ficient consumption  and — above  all — the  constant,  sick- 
ening loss  of  life  be  actively  forcing  a  consideration  of  the 
reasons  for  continued  fighting  ?  In  that  way  peace  may 
come  before  even  the  minimum  of  subsistence  is  reached. 
It  is  a  psychological  question.  The  Germans  have  unity, 
industry  and  a  disciplined  readiness  to  yield  to  leader- 
ship. Their  thrift  can  work  wonders,  if  pushed  to  the 
extreme.  It  is  only  because  their  abstention  from  un- 
necessary consumption  is  so  great,  and  so  fully  under  con- 
trol, that  the  enormous,  potential  surplus  of  modern  pro- 
duction can  be  given  over  to  the  war  in  return  for  bonds. 
So  long  as  the  patriotic  disposition  exists  to  assume  more 
debt,  even  on  a  declining  total  of  production,  then  new 
loans  can  be  placed.  That  is  a  means  of  postponing  the 
economic  reckoning  to  the  future. 

By  credit  operations  losses  are  thrown  forward  on  the 
future.  Germany's  borrowing  power  (in  this  case  at 
home),  her  credit,  depends  upon  the  belief  of  lenders  in 
p  her  producing  power,  not  in  the  exceptional 

recovery  emergencies  of  war,  but  in  normal  conditions 

er  war.  ^£  p^g^^g  jj^j,  ability  to  carry  her  staggering 
burden,  therefore — if  she  does  not  repudiate — depends 
upon  her  power  to  produce  in  the  future.     Then  will  come 


GERMAN   CREDIT  OPERATIONS  277 

into  play,  under  conditions  which  will  stimulate  them  to 
the  utmost,  her  characteristic  persistence,  thrift,  organ- 
izing power,  energy,  and  industrial  eflSciency.  If  excep- 
tional reasons  exist  for  restoring  capital,  and  the  effective 
desire  of  accumulation  becomes  intensely  active,  it  would 
be  possible  to  add  to  capital  almost  all  the  annual  surplus 
of  wealth  above  necessaries,  and  in  a  surprisingly  short 
time  there  would  be  as  much  capital  in  existence  as 
before;  and  then  could  begin  again  extravagance  and 
waste,  and  the  loss  of  capital  in  overconfident  specula- 
tion. Also,  in  spite  of  the  frightful  losses  of  man  power, 
we  all  know,  when  restraints  upon  population  are  re- 
moved, with  what  amazing  rapidity  numbers  increase  to 
the  point  where  they  are  limited  only  by  the  standards 
of  living.  Whatever  the  outcome  of  the  war,  there  is 
not  much  doubt  of  the  continuance  of  racial  character- 
istics in  the  typical  German  residuum. 


CHAPTER  VI 

WAR  AND  CREDIT  IN  NEUTRAL  UNITED  STATES 

The  interdependence  of  commercia!  countries — The  United  States  a 
debtor  nation — Our  credit  not  expanded — Selling  of  our  securities 
and  exports  of  gold — Cause  of  the  crisis  of  1914— The  credit  sys- 
tem— Return  of  our  securities  by  foreigners  for  gold — Pros  and 
cons  as  to  closing  the  stock  exchange — Stoppage  of  international 
trade — Gold  shipments — Confusion  in  the  exchanges — The  do- 
mestic drain — Shock  to  internal  trade — Necessity  for  lending 
freely — ^Assets  unliquid — Clearing-house  loan  certificates — Al- 
drich-Vreeland  notes — Expansion  of  loans — Falling  off  of  imports 
— Exports  decline,  then  rise — Cotton — Cotton  pool — Countries 
to  which  increased  exports  went — South  American  trade — Balance 
of  trade — Movement  of  securities — Exports  of  gold — Gold  pools 
— Items  offsetting  exports  of  goods — Loans  to  Europe — Exchange 
on  neutral  countries — Dollar  exchange — Inflation — Federal  Re- 
serve system — Causes  of  high  prices — Effect  of  war  on  saving — 
Loans  to  foreign  countries. 

§  1.     In  studying  the  effects  of  so  unparalleled  a  war, 
nothing  is  more  striking  than  the  bright  light  it  throws 
upon  the  familiar  truism  regarding  the  close  interdepen- 
dence of  one  industry  upon  another,  and  of 

Interdepen-  •     i      .    •   i  i  •    i 

dence  of  ouc  mdustriai  and  commercial  country  upon 

credu"^^*"**  another.  This  interweaving  of  economic  re- 
lationships had  been  going  on  ever  since  divi- 
sion of  labor  and  exchange  of  goods  between  different 
countries  and  climates  began;  it  grew  with  every  devel- 
opment of  new  machinery  and  the  opening  up  of  new 
sources  of  materials  for  manufactures  in  all  parts  of  the 
world;  and  with  the  cheapening  of  efficient  transpor- 
tation, by  rail  and  by  ship,  the  close  ties  of  trade  have 
multiplied   a   thousandfold,   uniting   remote   towns  and 

278 


CREDIT  IN  THE  UNITED  STATES       279 

hamlets  with  the  centres  of  trade  and  exchange.  But 
these  ties  may  be  more  accurately  described  as  the  results 
of  the  interdependence  of  credit.  As  a  consequence  of 
the  exchange  of  products,  credit  obligations  have  been 
entered  into  which  bind  men  together  in  every  branch  of 
trade  and  in  every  commercial  centre  throughout  the 
known  world.  So  strong  have  been  these  bonds  that 
they  have  often  kept  nations,  even  on  strong  provoca- 
tion, from  entering  into  war. 

In   the   years   preceding    1914    the   credit   obligations 
which  bound  us  to  Europe  were  mainly  those  of  a  coun- 
try  owing   large   sums   both   on  permanent  investment 
and  on  current  trade  account  to  transatlantic 
creditors.     We   had    borrowed    to   build    our        our  credit 
railways,  to  open  our  mines;   in  general,   to        ties  to 
develop  our  resources;  so  that  the  market  for 
capital  in  London  or  on  the  Continent  affected  us  closely.^ 
Even  our  largest  municipalities  had  floated  temporary 
loans  in  London  or  Paris. 

Moreover,  we  had  been  relying  upon  foreign  capital  to 
move  our  exportable  crops,  such  as  cotton  and  wheat,  to 
European  markets.     Even  at  the  risk  of  repetition  the 

1  As  a  practical  illustration  of  our  credit  dependence  on  foreign  markets,  the 
president  of  a  large  American  railway  informed  the  author  that  his  request  for 
a  loan  of  three  or  four  million  dollars  in  New  York  was  held  up  by  the  Argen- 
tine crisis  arising  from  an  expansion  of  cedillas  in  1891  and  the  consequent  inabil- 
ity to  liquidate  obligations  in  London,  especially  those  of  the  Baring  Brothers, 
who  had  invested  largely  in  Argentina.  He  found  that  a  rival  road  in  western 
competitive  territory  was  cutting  rates  and  taking  away  his  traffic,  quite  against 
reason  and  repeated  offers  to  adjust  the  situation.  The  rival  road,  it  seems 
had  orders  to  swell  receipts  in  every  possible  manner,  because  its  securities, 
largely  held  in  England,  and  being  of  high  standing,  were  just  then  being  sold 
in  American  money  markets  as  the  best  means  of  realizing  cash  resources  for 
the  Barings.  Hence,  the  necessity  of  making  a  good  showing  in  receipts  while 
foreign  holdings  were  being  disposed  of  in  New  York,  and  the  consequent  poor 
showing  of  the  president's  own  railroad  which  made  a  loan  to  him  difficult. 
Thus  the  relation  between  Argentine  cedulas  and  railway  rates  and  credit  in 
the  Pacific  coast  territory  of  our  own  country  was  direct  and  inevitable. 


280  CREDIT  OF  THE  NATIONS 

use  of  international  forms  of  credit  may  be  briefly  de- 
scribed to  fit  the  American  situation.  The  exporters  of 
our  products,  at  the  time  of  shipment,  drew  bills  on  the 
foreign  buyer  payable,  say,  at  sixty  or  ninety  days, 
for  the  value  of  the  cargo,  accompanied  by  bills  of  lad- 
ing as  documentary  proof  of  the  transaction.  Even  be- 
fore the  shipment  reached  the  other  side,  the  bill  would 
have  reached  the  foreign  purchaser,  who,  by  writing  his 
name  and  the  date  across  the  bill  under  the  word  "ac- 
cepted," made  of  the  bill  an  acceptance.     By  this  act  the 

bill  became  the  obligation  of  the  acceptor, 
marketing  Frequently  the  buyer  arranged  with  a  bank 
°b^  ^ d*'^'^*^*^     to   accept   such   bills   for   him.     Such   paper 

became  discountable  at  any  foreign  centre 
where  the  standing  of  the  acceptor  was  known.  By  this 
process  we  got  the  use  of  foreign  capital  to  move  our  cot- 
ton or  wheat  crop.  The  American  exporter,  as  soon  as 
the  acceptance  was  discounted  in  London,  or  Hamburg, 
as  the  case  may  be,  had  a  credit  to  his  account  abroad. 
He  could  draw  sight  bills  on  this  sum,  sell  the  bill  to  an 
American  bank,  and  obtain  a  credit  here.  By  so  doing,  he 
released  his  own  capital  immediately,  while  the  burden 
of  waiting  until  the  foreign  buyer  paid  off  the  bill  was 
thrown  on  the  foreign  lenders  of  capital.  Usually,  he 
could  employ  his  capital  here  at  a  higher  rate  than  that 
paid  for  the  foreign  discount.  In  such  credit  operations 
our  annual  exports  of  cotton  alone  called  for  $300,000,000 
to  $400,000,000.  To  this  must  be  added  the  sums  for 
moving  wheat,  copper,  materials,  manufactures,  and 
all  kinds  of  exports,  amounting,  in  1913,  to  nearly 
$2,500,000,000. 

It  may  thus  be  realized  how  dependent  our  own  coun- 
try is  upon  the  uninterrupted  payment  at  maturity  of 
the  enormous  volume  of  credit  obligations  owed  to  us. 


CREDIT  IN  THE  UNITED  STATES       281 

or  of  those  owed  by  us  for  imports  which  are  used  as  an 
offset  against  our  exports.  As  a  debtor  nation  our  ex- 
ports ought  normally  to  exceed  our  imports; 
but  if  there  is  a  balance  against  us,  it  may  be  borrowings 
covered  by  the  sale  of  securities,  or  carried  for-  ^°^  "'°^^* 
ward  by  other  forms  of  indebtedness  to  Europe.  Only  if 
all  the  items  in  the  international  account  fail  to  balance 
then  as  a  last  resource  gold  is  shipped;  but  in  the  long 
run  we  are  able  fundamentally  to  pay  for  our  imports 
of  goods  and  for  our  financial  obligations  by  our  exports 
of  merchandise  of  various  kinds.  So  heavily  had  we  bor- 
rowed from  abroad  that  the  volume  of  American  securi- 
ties owned  in  Europe  before  the  war  was  variously  esti- 
mated at  from  $4,000,000,000  to  $6,000,000,000.  If  Eu- 
rope distrusts  us  (as  she  did  when  we  nearly  drifted  on 
to  the  silver  standard  in  1891-1893),  or  if  she  needs  the 
capital  at  home,  she  withdraws  her  capital  by  sending 
our  securities  home  and  calling  on  us  to  pay  for  them;  and 
pay  we  must,  either  in  additional  exports  of  our  products, 
or  in  exports  of  gold  (the  only  money  which  is  to-day  a 
solvent  of  debt  in  international  trade).  The  countries 
which  have  held  the  most  of  our  securities,  that  is,  the 
countries  which  have  loaned  us  the  most,  have  been  Eng- 
land, Holland,  and  Germany. 

The  depression  in  the  money  markets  of  Europe  ever 
since  the  Balkan  Wars  had  its  counterpart  in  the  United 
States.  The  bank  reserves,  especially  of  southeastern 
Europe,  had  been  depleted  by  frightened  de-  j^^  ression 
positors  to  the  amount  of  several  hundreds  of  before 
millions  of  dollars;  securities  had  been  declin- 
ing in  price,  and  lending  was  much  restricted  by  the  feel- 
ing of  uncertainty.  The  corresponding  depression  in  the 
United  States,  while  not  so  severe,  reflected  the  European 
situation.     It  was  not  easy  to  place  new  securities  or  to 


CREDIT  OF  THE  NATIONS 

obtain  new  capital.  There  was  a  general  tendency  to 
avoid  new  enterprises.  The  crops  of  1913  had  been  scant, 
and  the  prices  of  food  were  high,  followed  by  a  demand 
for  higher  wages;  public  interference  with  business  and  dis- 
satisfaction with  the  manner  in  which  the  railways  had 
been  regulated  had  caused  a  feeling  of  depression;  and  the 
long  session  of  Congress,  which  had  been  busy  on  waj^s 
of  controlling  competition  in  industry,  had  created  a 
state  of  uneasiness.  In  addition,  the  policy  of  "baiting" 
the  railroads  and  other  corporations  had  injured  the 
credit  of  borrowing  organizations.  Large  as  were  our 
own  accumulations  of  capital  (which  had  been  growing 
rapidly),  they  were  not  large  enough  to  develop  all  our  re- 
sources; so  that  our  present  scale  of  operations,  with  their 
increasing  needs,  could  not  be  carried  on  as  effectively 
as  in  the  past  without  obtaining  very  considerable  sup- 
plies of  capital  from  Europe.  Any  events  which  would 
restrict  the  lending  power  of  countries  closely  related  to 
us  would  directly  affect  our  supply  of  capital.  Thus,  it 
happened  that  there  had  been  a  liquidation  of  securities 
going  on  and  a  hesitant  industrial  policy  adopted  by  us  for 
some  years;  and  when  the  European  War  came,  fortu- 
nately it  did  not  find  us  with  extended  credit.  In  all 
essential  matters  business  conditions  were  normal  and 
sound  at  home. 

It  is  now  obvious  that  in  the  summer  of  1914  Conti- 
nental capitalists,  especially  those  of  the  Central  Powers, 
were  earlier  informed  than  we  of  what  was  imminent. 
_     _    ^        There  had  been  off  and  on  a  movement  of  our 

Exports  of 

gold  early  sccuHties  from  Europe  for  realization  in  our 
m  1914-  markets.     In  the  early  part  of  1914  our  ex- 

ports also  fell  off,  which,  with  the  sale  of  foreign  holdings 
here,  led  to  a  balance  against  us,  making  it  profitable  to 
export  a  considerable  amount  of  gold  in  May  and  June. 


,  o>  Z 

onv    I  —  uj 

-iTfir  -J 

3Nnr  >  < 

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CREDIT  IN  THE  UNITED  STATES       283 

(See  Chart  VI.)  Thus  already  coming  events  were  cast- 
ing their  shadows  before.  The  exports  of  gold  would  not 
have  taken  place  at  this  time  before  the  war  without  the 
premeditated  selling  of  securities  in  our  markets  by  Euro- 
peans who  foresaw  trouble.  But,  irrespective  of  the  sell- 
ing to  us  of  our  own  securities,  there  was  a  large  balance 
already  due  by  us  to  Europe,  based  upon  the  large  imports 
into  the  United  States  from  March  to  September,  1914, 
when  imports  of  merchandise  even  exceeded  exports  (see 
Chart  VII);  expenditures  of  Americans  abroad;  payments 
for  ocean  freights;  former  borrowings  from  Europe;  and 
the  recent  placing  of  our  securities  there.  The  exceptional 
international  trade  situation,  which  for  so  many  months 
in  the  spring  and  summer  of  1914  reduced  our  exports  of 
goods,  had  not  been  equalled  for  many  years  and  has  not 
since  been  repeated  during  the  war. 

These  events  came  upon  us  as  a  neutral  country.  At 
that  time  we  had  not  the  remotest  intention  of  joining  in 
the  struggle.  The  study  of  our  credit  operations,  during 
the  war,  therefore,  obviously  divides  itself  into  (1)  those 
occurring  during  the  period  of  our  neutrality,  and  (2) 
those  arising  later  from  our  participation  in  the  war.  In 
this  volume  attention  will  be  confined  to  the  former. 

§  2.     The  crisis  of  1914  in  the  United  States  on  the 
outbreak  of  the  European  War  was  in  every  way  differ- 
ent from  any  other  in  our  history.     Because  of  unsettled 
conditions  of  credit  for  several  years  our  busi- 
ness had  been  restricted,  speculation  was  ab-  credit" 
sent,  and  banks  were  in  a  sound  and  conserva- 
tive   position.     An   overexpansion  of  credit   which  has 
usually  preceded  our  panics  (as  in  1907)  did  not  exist. 
In  other  words,  it  was  not  a  credit  panic;  although  the 
effects  of  the  war,  of  course,  reacted  on  credit.     A  series 


284  CREDIT  OF  THE   NATIONS 

of  events  which  interfered  with  the  normal  movement  of 
goods,  securities,  and  gold  inevitably  struck  heavy  blows 
at  the  very  bases  of  all  credit.  The  war  thus  affected 
credit,  but  only  through  its  effect  on  the  production  and 
exchange  of  goods.  It  is,  therefore,  not  possible  to  distin- 
guish between  the  effects  of  the  war  on  credit  and  the 
money  market,  on  the  one  hand,  and  those  on  foreign 
commerce,  or  domestic  production  and'  trade  in  goods, 
on  the  other;  because  all  were  closely  united.  Neverthe- 
less, for  the  sake  of  clear  exposition,  it  seems  advisable  to 
recount  and  explain  first,  since  their  appearance  is  first 
noticeable,  the  disturbances  in  the  world  of  credit  and 
money. 

The  sensitiveness  of  credit  operations  to  coming  danger, 
since  one  of  the  chief  functions  of  credit  has  been  to  dis- 
count the  future,  records  itself,  even  before  industry  has 

been  directly  affected,  in  the  markets  for  capi- 
proportionto  tal  and  sccuritics.  When  we  speak  of  our 
**^ods^^  ^°       credit   system    we   mean    the   machinery   by 

which  capital  is  passed  from  those  who  have 
it  to  those  who,  through  borrowing,  show  an  effective  de- 
mand for  it.  Institutions  that  supply  capital  are  usually 
banks:  (1)  Investment  banks  (trust  companies,  savings- 
banks,  and  even  those  commercial  banks  which  mix  invest- 
ment with  legitimate  banking)  provide  capital  for  long- 
term  uses,  with  which  we  are  not  now  directly  concerned 
in  this  study;  and  (2)  commercial  banks,  which  in  their 
legitimate  function  provide  capital  for  short-term  uses 
mainly  connected  with  dealings  in  staple  goods,  and  with 
which  we  are  now  directly  concerned.  The  whole  business 
public  is  dependent  on  commercial  banks,  for  the  simple 
reason  that  industry  and  trade  are  largely  carried  on, 
and  legitimately  so,  by  borrowed  capital ;  in  proportion  as 
a  firm  produces  more  goods,  or  buys  and  sells  more  goods. 


CREDIT  IN  THE  UNITED  STATES       285 

it  is  pro  tanto  entitled  to,  and  usually  gets,  more  loans 
from  the  banks.  That  is,  legitimate  credit  normally  ex- 
pands or  contracts  with  the  increase  or  decrease  of  trans- 
actions in  goods.  Credit  does  not  increase  capital;  it  fa- 
cilitates its  movement.  Capital,  made  up  of  the  funds 
to  be  devoted  to  getting  an  income  mainly  in  connection 
with  the  production  and  exchange  of  goods,  is  the  funda- 
mental thing;  credit  has  to  do  with  the  marketing  of 
capital. 

The  Continental  markets  in  which  securities  are  bought 
and  sold  were  already  recording  seismic  shocks,  as  we 
have  seen,  as  early  as  April  and  May.  In  this  country 
there  seems  to  have  been  a  general  belief  that 

Pf  cssurc  Or 

the  danger  of  a  general  European  war  would   selling  on 
be  averted,  as  it  had  been  so  often  before.    New  York 

stock-market. 

Discount  rates,  foreign  exchange,  and  prepara- 
tions for  dealing  with  a  coming  record-breaking  wheat 
crop,  as  well  as  a  very  large  cotton  crop,  showed  normal 
conditions  even  as  late  as  Monday,  July  20,  1914,  when 
Germany's  position  regarding  Serbia  was  announced  in 
Vienna.^  On  Wednesday,  July  22,  when  the  ultimatum 
to  Serbia  was  despatched,  the  situation  became  serious. 
Now  began  an  increasing  volume  of  sales  of  our  securities 
in  the  New  York  market  for  the  credit  of  foreign  holders. 
The  very  fact  that  we  were  not  involved  in  the  war  made 
our  markets  the  best  in  which  to  sell.  Europeans  in 
stress  were  recalling  the  capital  they  had  loaned  to  us; 
and  they  drew  on  their  new  credits  here,  necessitating  en- 
larged exports,  either  of  goods  or  gold.  As  early  as  July 
13  the  prices  of  securities  had  been  falling.  This  meant 
the  weakening  of  accounts  carrying  securities.  By  Mon- 
day, July  27,  it  was  evident  that  Germany  and  Austria- 
Hungary  intended  to  use  the  Serbian  matter  as  a  means 

1  Cf.  Chronology,  p.  79. 


286  CREDIT   OF  THE  NATIONS 

of  forcing  Russia's  hand,  or  go  to  war.  Then,  as  we  have 
seen  already,  the  foreign  exchanges  collapsed.  On  July 
28,  when  war  was  declared  against  Serbia,  enormous  sales 
of  securities  were  made  on  the  New  York  Exchange  by 
foreigners.  Selling  by  frightened  American  owners  and 
short  sales  by  bears  also  added  to  the  depression  in  prices. 
The  situation  went  from  bad  to  worse.  On  the  29th 
practically  all  the  markets  on  the  Continent  had  been 
closed.  In  this  country  there  was  as  yet  a  naive  failure 
to  appreciate  the  gravity  of  the  danger.  On  Thursday, 
July  30,  the  frantic  efforts  of  Europeans  to  realize  on 
their  securities  in  cash  concentrated  the  selling  upon  New 
York,  the  one  best  remaining  market  in  which  to  sell. 
Even  then  there  was  a  stubborn  belief  here  that  our 
power  to  absorb  securities  could  stand  up  against  this 
strain. 

It  is  to  be  recalled  that  already  forces  were  at  work 
connected  with  our  merchandise  account,  which  of  them- 
selves would  have  led  to  the  export  of  gold  for  good  and 
suflScient  reasons.  The  war  added  new  forces 
be^top™d^*  working  in  the  same  direction.  Such  an  ava- 
lanche of  selling  orders  from  foreigners  had  a 
significant  effect  on  our  banking  reserves  and  so  on  the 
lending  power  of  the  banks.  The  selling  and  buying 
by  domestic  holders  of  securities,  whose  accounts  were 
carried  with  our  own  banks,  from  whom  they  have  bor- 
rowed to  carry  stocks,  did  not  reduce  the  aggregate 
stock  of  gold  held  among  the  lending  institutions.^  But 
the  selling,  as  in  this  case,  being  by  foreigners,  and  the 
international  situation  being  such  that  we  could  not  at 
once  command  gold  on  finance  bills,  or  otherwise,  in  South 
America,  Asia,  or  any  non-European  markets,  the  imme- 

1  Cf.  O.  M.  W.  Sprague,  "The  Crisis  of  1914  in  the  United  States,"  American 
Economic  Review,  September,  1915,  p.  510. 


CREDIT  IN  THE  UNITED  STATES       287 

diate  effect  was  to  create  here  a  demand  for  the  exporta- 
tion of  gold,  just  at  the  outbreak  of  a  crisis,  when  there 
must  be  an  inevitable  and  very  urgent  pressure  for  loans 
from  our  own  bank  customers.  Hence  the  selling  must 
be  stopped  in  the  interest  of  our  own  borrowing  public. 
On  the  face  of  the  situation  this  pointed  to  some  such 
drastic  action  as  the  closing  of  the  stock  exchange. 

Against  this  action  it  is  to  be  urged  that  it  would  im- 
pound, or  render  unliquid,  all  bank  assets  consisting  of 
stock-exchange   collateral;  that  there  would  be  no  way 
of  calling  in,  or  contracting,  the  volume  of 
such  loans  to  meet  new  conditions;  that  the       !!f°!ffl 

cons  aS   tO 

weaker  banks  caught  in  a  sudden  emergency  closing  the 
could  not  shift  loans  to  stronger  banks  by  exchange, 
selling  securities,  or  calling  their  loans;  and 
finally,  that  if  banks  chose  to  make  loans  on  stock-ex- 
change collateral  (which  in  Europe  bear  a  higher  discount 
rate,  as  being  less  liquid  even  in  normal  times),  they 
should  take  their  medicine  bravely  with  all  its  conse- 
quences, even  if  it  led  to  an  earlier  and  larger  issue  of  clear- 
ing-house loan  certificates  as  a  last  recourse.  On  the 
other  hand,  the  closing  of  the  stock  exchange  would  stop 
at  once  the  further  creation  of  any  additional  indebted- 
ness for  foreign  account,  which  already  had  reached  alarm- 
ing proportions;  and  it  would  prevent  any  further  de- 
cline in  the  prices  of  securities,  likely  to  be  offered  in  wild 
excitement  and  panic,  and  thus  prevent  the  crumbling 
away  of  the  market  values  of  collateral  held  by  the 
banks  and  save  a  legion  of  borrowers  from  failure  if  loans 
were  called. 

Such  were  the  alternatives  which  presented  themselves 
on  Thursday,  July  30.  As  in  every  crisis,  the  banks  of 
a  country  having  international  relations  had  to  face  two 
drains  upon  their  reserves:  (1)  the  foreign  and  (2)  the  do- 


288  CREDIT  OF  THE  NATIONS 

mestic.     The  deluge  of  selling  from  abroad  had  the  direct 
effect  of  a  run  on  our  stock  of  gold  for  exportation,  the 
insistence  of  which  could  not  be  controlled  by 
Foreign  ^j^g  ordinary  means  of  raising  the  rate  of  dis- 

count for  loans.  If  selling  continued,  there  was 
nothing  to  do  but  to  export  larger  amounts  of  gold,  which 
would  weaken  the  fabric  of  our  credit.  The  purchasers  of 
the  securities  thus  thrown  on  the  market  would  have  to 
be  granted  loans,  as  well  as  those  customers  of  the  banks 
whose  position  had  been  made  insecure  by  the  sudden 
crisis  in  business.  An  effective  way  to  meet  the  foreign 
drain  was  to  close  the  stock  exchange.  The  problem  was 
one  affecting  banks  and  the  whole  borrowing  community, 
and  not  merely  the  dealers  in  stocks.  But  the  standing 
of  our  securities  would  be  seriously  shaken  if  it  were 
^,    .      .        shown  that  they  were  refused  a  market  on 

Closing  of  *' 

the  stock  our  owu  exchanges,  and  could  not  be  taken 
exc  ange.  ^^  -^^^  ^^  when  salcs  Were  desired.  The  only 
reply  to  this  was  that  the  juncture  was  unparalleled  and 
beyond  all  normal  treatment.  Under  these  difficult  con- 
ditions, American  optimism,  on  July  30,  had  still  hoped 
for  a  prevention  of  war.  On  the  afternoon  of  that  day 
it  was  decided  to  take  no  action.  No  collapse  had  taken 
place  and  no  money  panic  had  appeared.  On  Friday 
morning,  in  consultation  with  London,  after  it  was  known 
that  an  immense  volume  of  selling  orders  from  all  over 
the  world  hung  over  the  market,  it  was  decided  only  four 
minutes  before  the  usual  hour  of  opening  to  close  the 
stock  exchange  until  further  notice.^  The  exchanges  in 
other  cities  followed  suit.  Thus  was  accomplished  the 
task  of  cutting  off,  in  spite  of  certain  disadvantages,  the 
exceptional  foreign  drain  on  our  gold  stock.     It  did  not, 

1  Cf.  H.  G.  S.  Noble,  The  New  York  Stock  Exchange  in  the  Crisis  of  1914  (1915), 
p.  12.  Only  once  before,  for  ten  days  in  1873,  had  the  exchange  ever  beeu 
closed. 


CREDIT  IN  THE  UNITED  STATES       289 


however,  prevent  the  exportation  of  some  gold,  but  it  did 
keep  it  from  going  to  an  extreme  which  might  have  seri- 
ously endangered  our  ability  to  maintain  gold  payments. 

This  war  between  so  many  nations  closely  connected 
with  the  United  States  by  international  trade  struck  at 
the  very  basis  of  credit,  not  only  by  unsettling  the  own- 
ership of  securities,  but  by  the  interruption 
and  even  in  some  cases  by  the  actual  stoppage  upheaval  of 
of  the  international  movement  of  goods.  The 
effect  of  the  European  War  on  our  foreign  trade  has  been 
surprising,  never  equalled,  and  startling  in  the  magnitude 
of  its  changes.  Never  before  have  we  had  such  an  up- 
heaval. Problems  have  accordingly  arisen  which  could 
never  have  been  anticipated.  Not  only  because  the  seas 
became  unsafe,  but  because  the  usual  markets  for  goods 
were  either  cut  off  or  thrown  into  confusion,  at  once  ex- 
ports and  imports  of  merchandise  lost  their  normal  rela- 
tions, means  of  payment  became  uncertain,  and  the  for- 
eign exchanges  were  paralyzed. 

Imports  into  our  country  had  been  declining  since 
March,  1914,  and  by  December  they  had  reached  the 
lowest  point  in  five  years,  or  about  $70,000,000  ^  ^,  ^  ^ 
below  the  previous  December.     Europe  was    both  imports 

11.  1  1  IP  *  And  exports. 

unable  to  send  us  goods,  and,  oi  course,  ma 

time  of  such  disturbance  we  were  unwilling  to  buy.^     The 


'  The  imports  of  goods  from  various  countries  in  the  fiscal  years  ending 
June  30  of  1914  and  1915,  were  as  follows  (in  millions): 


Austria-Hungary 

Belgium 

France 

Germany 

Russia 

Great  Britain . . . . 

Cuba 

Argentina 


1914 


$20.1 

$9.7 

41.0 

10.2 

141.4 

77.1 

189.9 

91.3 

20.8 

2.5 

293.6 

256.3 

131.3 

185.7 

45.1 

73.7 

290  CREDIT  OF  THE  NATIONS 

brief  upturn  of  imports  in  September  and  October  was 
due  to  the  belated  arrivals  of  goods  ordered  before  the 
war.  The  general  decline  in  imports  was  recuperative,  as 
far  as  it  went,  inasmuch  as  it  reduced  the  sums  which 
otherwise  would  have  to  be  paid  to  Europe.  So,  also, 
was  the  stoppage  of  American  expenditure  for  travel  in 
Europe  then  brought  to  an  end  by  the  war.  But  our  ex- 
ports also  fell  off  sharply  in  August  (see  Chart  VII) ,  and, 
although  they  gradually  picked  up  again,  it  was  December 
before  our  monthly  exports  reached  the  level  of  the  pre- 
ceding year.  Thus  the  war  first  hit  directly  at  our  ex- 
ports, on  which  we  might  have  depended  for  support  to 
our  stock  of  gold  and  to  the  foreign  exchanges.  Not  being 
able  to  draw  on  credits  for  goods  sold  to  Europe  as  for- 
merly, and  having  heavy  drains  on  us  for  sums  due  on 
securities  returned  to  us,  the  only  means  of  meeting 
our  immediate  obligations  were  by  shipments  of  gold. 
Acute  ^^  acute  was  the  demand  for  gold  to  meet 

demand  international  payments  that  the  price  of  ex- 

^^^°  '  change  rose  to  a  height  before  unknown.     In 

effect,  of  the  items  entering  into  the  international  account 
(movement  of  goods,  securities,  ocean  freights,  travellers' 
expenditure,  and  the  shipment  of  gold),  those  of  goods 
and  securities  were  so  overwhelmingly  against  us  that 
the  foreign  drain  on  our  gold  persisted  in  full  force. 

Since  this  crisis  of  1914  was  characterized  chiefly  by 

its  international  features,  and  indeed  might  be  named 

an  international  crisis,  the  effects  upon  our  foreign  trade 

— which,    although    large    and    important,    is 

Interrelations        o.  niii  ^ij?  j 

of  credit.  alter  all  only  about  one-seventh  oi  our  do- 
mestic trade — had  an  importance  out  of  all 
proportion  to  its  quantitative  relations.  Indeed,  the 
workings  of  our  foreign  commerce  not  only  indicate  the 
interdependence  of  our  trade  with  that  of  other  nations. 


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i 


CREDIT  IN  THE  UNITED  STATES       291 

but  also  bring  out  the  vital  interrelations  of  credit.  In- 
ternational trade  and  credit  have  become  the  nerve-cen- 
tres of  our  system,  since  they  provide  the  machinery  by 
which  we  have  been  supplied  with  billions  of  dollars  of 
foreign  capital.  Our  domestic  production,  transporta- 
tion, and  distribution  of  goods  could  not  have  become 
what  they  are  without  the  aid  of  foreign  capital  invested 
here  in  former  years. 

Although  we  had  the  largest  wheat  and  cotton  crops 
in  our  history,  the  outbreak  of  the  war  prevented  expor- 
tation. European  crops  in  1914  were  short,  and  our 
breadstuff s  were  in  urgent  demand;   but,  al-         ^^.    . 

.  .  Shipping. 

though  a  neutral  nation,  we  had  very  few 
ships.  We  had  been  using  British  and  German  lines  as 
our  chief  commercial  carriers;  consequently,  when  Ger- 
man and  British  war-ships  were  raiding  each  other's  com- 
merce our  trade  practically  stopped.  Moreover,  no  in- 
surance for  cargoes  could  be  had,  because  the  war  risks 
were  too  great  to  be  carried  by  private  capital;  and  this 
situation  obtained  until  the  governments  of  Great  Britain 
and  of  the  United  States  established  marine  insurance 
departments  and  wrote  insurance  on  ships  and  cargoes. 
As  soon  as  the  superior  English  navy  drove  the  Germans 
from  the  Atlantic  our  exports  could  move. 

Meantime,  the  period  when  all  trade  and  credit  were 
interrupted  was  a  critical  one  for  us  in  many  ways. 
Since  exports  could  not  move  and  thus  create  bills  of  ex- 
change (or  claims  on  funds  in  Europe),  the 

Ov6rs6fl.s 

final  resort  was  the  shipment  of  gold.     But,      shipment 
for  a  time,  even  the  sending  of  gold  was  made      impos^siWe. 
physically   impossible.     The   German   steam- 
ship Kronprinzessin  Cecilie,  bearing  about  $12,000,000  of 
gold  from  New  York,  chiefly  for  London,  narrowly  escaped 
capture  and  put  back  to  a  safe  port  in  the  United  States. 


292  CREDIT  OF  THE  NATIONS 

As  a  result,  American  banks,  although  having  the  gold  to 
pay  with,  had  to  default  in  payment  of  gold  obligations 
due  in  London.  It  was  an  unprecedented  situation  for 
our  credit  institutions. 

Since  gold  could  not  be  sent  safely,  our  country,  al- 
though maintaining  the  gold  standard,  found  itself  for 
a  time  in  the  extraordinary  position  of  not  being  able  to 
meet  its  bills  of  exchange  when  due.  When 
exchange  at  the  shipping-poiut  disappeared  this  part  of 
^°"^ '  our  international  currency  became  irredeem- 
able, and  it  depreciated.  The  frantic  demand  for  ex- 
change on  Europe  to  pay  our  maturing  debts,  or  to  cover 
the  expenses  of  travellers  then  abroad,  sent  up  the  price 
to  unheard-of  figures  ($7  having  been  paid  for  £l,  whose 
par  was  $4.8665).  In  the  absence  of  gold  payments,  our 
bills  could  depreciate  to  any  point  fixed  by  the  demand 
for  European  funds.  They  could  return  to  par,  or  to 
normal  quotations,  only  when  gold  was  sent  (see,  later, 
the  account  of  the  Gold  Pool),  or  when  exports  could 
move.  A  considerable  exportation  of  goods  was  the  only 
effective  and  permanent  restorative.  The  international 
balance  against  us,  falling  due  before  January  1,  1915, 
was  estimated  to  be  about  $450,000,000. 

At  the  same  time,  the  war  had  so  disturbed  all  industry 
and  trade  at  home  that  the  domestic  drain  upon  our 
credit  institutions  was  also  disturbing  in  the  extreme. 
The  domestic  pressure  upon  the  banks  was 
dr«S^^*^*^  two-sided:  (1)  the  withdrawals  by  depositors, 
and  (2)  the  increased  demand  for  loans.  In 
a  very  short  time  the  reserves  of  the  New  York  Clearing- 
House  banks  (August  15)  were  $47,999,250  below  the 
legal  limit. ^     As  always,  in  a  time  of  stress,  not  only  in- 

'  The  United  States  has  no  representa,tive  central  institution  of  credit,  such 
as  the  Bank  of  England  or  the  Bank  of  France,  through  which  the  condition 


CREDIT  IN  THE  UNITED  STATES       293 

dividuals  and  firms  but  country  banks  drew  down  their 
deposits  (in  central  reserve  cities).  A  disturbance  of  the 
money  market  was  certain  to  cause  small  banks  to  en- 
large their  cash  resources  at  home;  and,  even  if  members 
of  the  Federal  Reserve  system,  they  are  still  likely  to 
maintain  this  habit,  in  spite  of  the  fact  that  they  can 
better  enlarge  their  reserves  by  rediscounts  at  their  re- 
serve bank.  Moreover,  the  reserves  of  the  banks  had  al- 
ready been  depleted  by  the  very  considerable  exports  of 
gold  in  April  and  May,  1914. 

The  shock  to  industry  at  home  was  benumbing.  Men 
of  affairs  were  taken  by  surprise,  filled  with  a  great  un- 
certainty. Every  one,  in  alarm,  suddenly  stopped  all 
buying  that  was  not  absolutely  necessary;  r  f  ai 
new  constructive  work  was  suspended;  pur-  business 
chase  of  machinery  and  equipment  almost  ^'  "*  ^' 
ceased.  Operations  in  the  oil-fields  were  restricted;  the 
iron  and  steel  industry  and  the  copper-mines  were  work- 
ing at  perhaps  one-half  capacity.  Most  goods  on  the 
shelves  being  unsalable,  merchants  could  not  repay  the 
wholesaler  or  the  producer.  Mills  and  furnaces  having 
no  market  for  their  products  ceased  to  work,  and  laborers 
were  thrown  out  of  employment.  Therefore,  if  buyers 
of  goods  no  longer  paid  those  who  had  borrowed  from 
banks  to  carry  goods,  the  borrowers  could  not  pay  off 
their  notes  now  maturing  at  the  banks.  Business  men 
had  been  legitimately  borrowing  from  banks  to  get  capital 
to  meet  current  needs  for  materials,  wages,  or  to  carry 
finished  goods  in  warehouse  or  in  transit.     It  was  a  criti- 

of  credit  in  the  whole  country  is  reflected.  The  nearest  index  of  that  sort  we 
have,  whose  accounts  are  typical  of  others,  is  the  association  of  banks  in  the 
New  York  Clearing-House.  The  Federal  Reserve  Banks  do  not  fill  a  corre- 
sponding function,  for  they  are  detached  from  the  general  field  of  discounting. 
Their  member  banks,  moreover,  which  include  the  national  banks,  did  not  at 
this  time  do  more  than  one-half  the  banking  business  of  the  country. 


294  CREDIT  OF  THE  NATIONS 

cal  and  momentous  time  for  them.  The  inability  to 
make  collections,  or  to  obtain  cash  for  securities  after  the 
closing  of  the  stock  exchanges,  did  not  change  the  fact 
that  engagements  entered  into  before  the  war  and  now 
falling  due  must  be  met,  or  business  ruin  must  result. 
No  goods  nor  men  nor  resources  had  been  destroyed. 
Business  houses  had  goods,  but  not  that  which  would 
pay  debts.  So  far  as  actual  money  was  concerned,  there 
was  as  much  in  the  country  as  ever  before.  The  out- 
standing need,  in  truth,  was  for  a  means  of  payment  by 
credit.  Not  only  must  existing  loans  be  extended,  but 
new  loans  on  a  large  scale  must  be  granted  in  order  to 
prevent  failures,  just  at  a  moment  when  the  reserves 
were  being  drawn  down  by  both  a  foreign  and  a  domestic 
drain.  The  real  need  was  for  a  loan,  not  for  more  money; 
if  a  man  had  a  loan  he  could  pay  his  debt  by  a  check. 
All  depended  on  the  lending  power  of  the  banks.  Yet 
any  devices  which  would  obviate  the  necessity  of  paying 
out  gold,  now  so  urgently  demanded  for  export,  would 
help  to  lighten  the  domestic  drain.  These  devices  will 
be  explained  hereafter  (§3). 

Under  these  conditions  of  a  credit  crisis,  suddenly  to 
constrict  loans  to  the  business  public  would  have  been 
like  shutting  off  air  from  men's  lungs.  The  only  salva- 
Reason  for  ^^^^  ^^^  ^  bank  is  to  do  that  which  will  save 
lending  the  quality  of  its  assets ;  that  can  be  done  only 

by  preserving  the  solvency  of  its  customers 
whose  assets  it  holds.  Therefore,  when  everything  looks 
black — and  for  that  very  reason — it  is  in  the  joint  interest 
of  both  the  bank  and  its  constituency  to  lend  freely. 
Credit  is  the  means  of  throwing  the  burden  forward  and 
saving  borrowers  from  present  liquidation  in  alarming 
and  panicky  conditions;  it  gives  them  time  to  realize. 
And  yet  the  very  first  result  of  new  loans  (in  the  face  of 


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syvmoa  jo  SNoniiw 


CREDIT  IN  THE  UNITED  STATES       295 

dwindling  reserves)  is  to  give  borrowers  deposit  accounts 
on  which  they  can  draw  the  proceeds  of  the  loan.  That 
is,  new  loans  immediately  increase  the  demand-deposit 
liability,  and  thus  lower  still  further  the  percentage  of 
reserves  to  demand  liabilities.  But  loan  they  must,  even 
if  reserves  fall  far  below  the  legal  limits.     (See  Chart 

vm.) 

In  ordinary  crises,  when  cash  reserves  run  low,  banks 
may  increase  the  percentage  of  reserves  to  demand  lia- 
bilities by  calling  loans  and  thus  reduce  the  volume  of 
demand  items;  or  they  may  dispose  of  some 
high-grade  securities  in  home  or  foreign  money  unUqt^d. 

markets  for  gold  or  lawful  money.  In  1907 
the  New  York  banks  thus  imported  about  $116,000,000 
of  gold,  and  they  obtained  lawful  money  by  deposits  from 
the  United  States  Treasury.  But  in  the  crisis  of  1914  nei- 
ther of  these  things  was  possible.  Gold  was  being  fiercely 
demanded  of  us.  Moreover,  the  falling  off  of  our  imports 
directly  touched  the  income  of  this  country,  which,  like 
Germany,  depends  so  largely  upon  customs  duties;  and 
our  Treasury  ran  so  low  that  a  new  War  Revenue  Act 
was  passed  October  22,  1914,  to  obtain  necessary  funds. 
Nor  was  this  all.  The  usual  calling  of  loans  was  impos- 
sible for  special  reasons.  The  assets  of  our  banks  fall 
into  two  general  classes:  (1)  securities  held  as  collateral, 
and  (2)  paper  based  mainly  on  the  actual  sale  of  goods 
to  the  trade.  In  regard  to  the  first,  the  war  brought 
home  the  old,  sad  lesson  that  in  great  emergencies  the 
loan  account  based  on  stocks  and  bonds  is  not  liquid. 
The  prices  of  these  securities,  when  thrown  upon  the 
market  in  great  volume,  fall  to  a  ruinously  low  level; 
buyers  are  few.  In  this  crisis,  however,  as  we  have 
shown,  the  stock  exchanges  were  closed,  and  there  was  no 
market  for  them.     In  short,  all  such  assets  became  sud- 


CREDIT  OF  THE  NATIONS 

denly  frozen.  By  common  consent  the  banks  did  not  call 
collateral  loans  and  carried  the  collateral  at  the  minimum 
prices  of  July  30.  Thus  liquidation  and  bankruptcy 
were  so  far  avoided.  As  to  the  other  class  of  assets, 
the  unexpected  check  to  industry  and  the  interruption 
to  the  movement  of  goods,  already  described,  made  most 
of  these  for  a  time  unliquid.  The  banks  had  the  legal 
right  to  enforce  payment;  of  course  they  did  not  exercise 
it,  and  loans  were  extended.  That  is,  while  the  usual 
tests  of  solvency  were  held  in  abeyance,  the  benefit  of 
credit  postponed  liquidation  and  gave  time  for  recon- 
struction and  recovery.  It  is  incorrect,  there- 
the  situation,  ^ore,  to  say  that  in  this  crisis  credit  was  para- 
lyzed. It  was  precisely  the  working  of  credit 
that  saved  the  day.  It  is  but  simple  justice  to  record 
that  the  men  in  charge  of  the  banks  and  the  credit  sys- 
tem, in  contrast  to  the  action  of  the  English  joint-stock 
banks,  rose  to  the  occasion.  In  spite  of  the  unprecedented 
shock,  the  unliquidity  of  assets,  the  assaults  on  our  gold 
reserves,  they  loaned  freely,  even  if  reserves  fell  below 
the  legal  limits;  prevented  failures;  and  gradually  again 
set  in  normal  motion  the  machinery  of  credit  by  which 
capital  could  be  obtained. 

Complicated  as  the  situation  seemed  to  be,  the  relation 
of  cause  and  effect  was  clear.  The  sudden  closing  of  the 
markets  for  securities  and  the  stoppage  of  the  interna- 
tional movement  of  goods  threw  the  foreign 
oHvents.  exchanges  into  such  extreme  confusion  that 
they  could  be  righted  only  by  the  exportation 
of  gold.  If  gold  were  sent,  it  would  reduce  the  lawful 
reserves  at  the  time  supporting  our  credit  fabric.  Hence 
would  follow  a  direct  effect  on  our  credit  and  then  on  our 
currency.  If  the  banks  were  facing  heavy  demands  for 
cash,  not  only  by  a  foreign  drain  through  withdrawals  of 


CREDIT  IN  THE  UNITED  STATES       297 

gold  for  Europe,  but  also  by  a  domestic  drain  because  of 
difficulties  at  home,  they  could  protect  their  reserves  and 
thus  preserve  their  lending  power  only  by  some  device 
which  would  give  them  forms  of  money  acceptable  to  the 
public  and  obtainable  in  the  special  emergency  by  use 
of  their  approved  commercial  assets.  Such  a  device 
would  be  effective,  not  merely  because  it  increased  the 
quantity  of  money,  but  only  because  it  enlarged  the  lend- 
ing power  of  the  banks.  It  is  our  next  task  to  explain 
how,  in  fact,  this  was  actually  accomplished. 

§  3.  We  have  had  other  crises,  in  which  it  was  neces- 
sary to  aid  the  weakened  lending  power  of  the  banks.  To 
save  us  from  runs  on  deposits  and  to  quickly  turn  good 
assets  into  reserves  the  Federal  Reserve  Act  had  been 
passed  December  23,  1913.  But  the  new  system — due 
to  unnecessary  delays — was  not  in  operation  when  the 
crisis  of  1914  came  upon  us.  Consequently,  in  order  to 
make  liberal  loans,  even  when  the  reserves  were  far  be- 
low the  legal  limit,  it  was  necessary  to  loan  in  spite  of 
the  law  regarding  reserves  under  an  antiquated  banking 
system.  Banking  self-preservation  and  the  needs  of 
borrowers  forced  it. 

In  such  circumstances  inevitable  resort  was  had  to  a 
device  as  old  as  the  crisis  of  1861.     The  lending  power 
of  the  banks  was  enlarged  by  the  issue  of  clearing-house 
loan  certificates.     Whenever  a  bank  found  its 
reserves  down  to  the  minimum,  and  hence  its      cieanng- 
power  to  lend  restrained,  it  could  take  picked      certficate* 
assets  from  its  loan  account  to  a  committee 
of  the  Clearing-House  Association  and   obtain  clearing- 
house loan  certificates,  bearing  6  per  cent  interest  to  the 
amount  of  75  per  cent  of  the  value  of  the  pledged  as- 
sets.    In  a  word,  commercial  assets  were  coined  into  a 


\ 


298  CREDIT  OF  THE  Nx\TIONS 

partial  means  of  payment.  It  was  but  a  partial  means, 
because  these  certificates  could  be  used  only  for  paying 
balances  between  the  banks.  They  were  not  paid  out 
by  banks  to  the  public.  Moreover,  they  were  good  only 
within  the  group  of  banks  belonging  to  a  given  associa- 
tion and  not  available  in  payments  between  banks  of  dif- 
ferent groups. 

The  effect  of  the  issue  of  these  certificates  was  to  relieve 
the  banks  from  the  necessity  of  contracting,  or  of  refusing, 
loans.  As  a  matter  of  fact,  loans  could  not  be  much  con- 
vft^.*  „„         tracted,  because  such  assets  as  consisted  of  col- 

r/Sect  on  ' 

the  power  lateral  were  locked  up.  How,  then,  did  the  re- 
sort to  these  certificates  increase  the  lending 
power  of  the  banks  ?  In  granting  a  loan,  a  bank  already 
hard-pressed  straightway  must  give  the  borrower  a  deposit 
account  on  which  he  can  draw.  That  action  increases  the 
proportion  of  demand  deposits  to  cash  reserves,  and  still 
further  weakens  the  bank's  position.  If  the  borrower 
draws  a  check  on  his  new  deposit  to  pay  a  pressing  debt, 
that  check  is  certain  to  come  back  at  once  through  the 
clearing-house;  and,  normally,  the  bank  without  offsetting 
checks  due  it  would  be  obliged  to  meet  Its  adverse  bal- 
ance in  cash.  To  save  the  depletion  of  reserves,  however, 
a  bank  is  now  permitted  to  pay  its  balances  at  the  clear- 
ing-house in  certificates.  Such  a  device  is,  in  effect,  a 
suspension  of  cash  payments  between  the  banks. 

The  first  loan  certificates  were  issued  by  the  New  York 
banks  on  August  3,  and  the  last  were  cancelled  on  No- 
vember 28,  1914.  The  aggregate  issue  was  $124,695,000 
Extent  of  (^^  Compared  with  $101,060,000  in  1907),  of 
certificates  which  the  maximum  outstanding  on  any  one 
'""""'*•  date,  on  September  25,  was  $109,185,000  (as 

compared  with  $88,420,000  in  1907).  There  passed 
through  the  hands  of  the  committee,  all  told,  collateral 


CREDIT  IN  THE  UNITED  STATES       299 

amounting  to  $462,174,000,  of  which  50.7  per  cent  was 
commercial  paper,  35.5  per  cent  bonds  and  securities, 
and  13.8  per  cent  collateral  loans.  The  largest  volume 
used  was  in  August,  when  those  paid  in  on  clearing-house 
balances  amounted  to  .67  per  cent  of  the  total.  Of  all 
the  nine  other  issues  in  the  city  of  New  York,  first  begin- 
ning in  1860,  that  of  1914  was  the  largest. 

The  power  to  lend  freely  in  this  emergency  was  also 
aided  by  another  device,  permitted  by  the  Aldrich-Vree- 
land  Act  of  May  30, 1908,  whose  expiration  was  postponed 
by  the  Federal  Reserve  Act  one  year,  to  June 
30,  1915.  It  was  the  more  important  to  lend  to  Aidrich- 
freely  because  internal  conditions   had  been      Vreeiand 

''  .   .  .  notes. 

sound  and  the  crisis  had  been  induced  from 
without  by  the  war.  As  it  is  the  function  of  credit  to  pro- 
vide a  suitable  njeans  of  payment  in  times  of  stress  in  or- 
der to  give  time  for  obligations  to  be  met,  consequently 
generally  sound  internal  conditions  would  admit  of  early 
recovery.  Such  a  means  of  paynient,  in  the  form  of  elastic 
emergency  issues  by  the  national  banks,  was  tried  for  the 
first  time  in  this  exigency  of  1914.  It  was  a  makeshift 
necessitated  by  the  then  individualistic  banking  system 
under  which  no  elastic  note-issues  could  have  otherwise 
been  possible.  What  was  really  needed  was  an  elasticity 
of  credit  and  it  was  as  a  means  to  this  end  that  the 
emergency  currency  performed  its  function.  It  gave  the 
banks  a  means  of  paying  "cash"  without  losing  any  of 
their  lawful  money  reserves. 

Under  the  original  act  national  banks  could  issue  an 
amount  of  notes  equal  to  their  unimpaired  capital  and 
surplus,  provided  the  total  did  not  exceed  for  all    Amendments 
banks  $500,000,000.     These  emergency  notes    to  Act  of 
were  to  be  issued  on  the  presentation  to  the 
secretary  of  the  treasury  of  (1)  bonds  of  a  State,  county. 


300  CREDIT  OF  THE  NATIONS 

district,  or  municipality;  (2)  any  securities,  including  com- 
mercial paper,  offered  through  a  national  currency  asso- 
ciation, to  75  per  cent  of  their  cash  value;  (3)  but  to  only 
30  per  cent  of  their  capital  and  surplus,  if  on  commercial 
paper  alone.  No  bank  could  take  advantage  of  the  Act 
unless  it  already  had  outstanding  the  old  bond-secured 
notes  to  the  amount  of  40  per  cent  of  its  capital;  and  its 
total  issue,  including  its  bond-secured  notes,  must  not 
exceed  100  per  cent  of  its  unimpaired  capital  and  surplus. 
A  5  per  cent  redemption  fund  was  required.  The  notes 
were  taxed  5  per  cent  per  annum  the  first  month,  and  an 
additional  1  per  cent  for  each  month,  until  10  per  cent 
was  reached.  Each  currency  association  must  contain  at 
least  ten  banks,  with  an  aggregate  capital  and  surplus  of 
not  less  than  $5,000,000,  and  each  bank  in  it  must  have 
a  surplus  of  not  less  than  20  per  cent  of  its  capital.  The 
above  provisions  of  the  original  Act  requiring  40  per  cent 
bond-secured  notes,  the  prohibitive  rate  of  interest,  and 
the  inability  to  get  out  of  an  association  when  once  in, 
acted  as  restrictions  on  the  scheme,  and  few  associations 
were  at  first  formed.^  The  Federal  Reserve  Act  (Decem- 
ber 23,  1913)  reduced  the  tax  to  3  per  cent  per  annum 
for  the  first  three  months,  with  an  additional  one-half 
per  cent  for  each  month  until  6  per  cent  was  reached. 
The  Act  of  August  4,  1914,  removed  the  requirement  of 
40  per  cent  of  bond-secured  notes,  raised  the  total  issue 
to  125  per  cent  of  the  capital  and  surplus,  and  abolished 
the  Irniit  of  $500,000,000  to  the  total  circulation.  It  was 
also  given  out,  on  August  27,  by  the  secretary  of  the 
treasury,  that  paper  based  on  warehouse  receipts  of  cot- 
ton and  tobacco,  and  having  not  over  four  months  to  run, 
would  be  available  through  currency  associations  for  notes 
to  75  per  cent  of  their  value. 

'  For  a  full  discussion  of  the  Act  by  the  author,  see  Journal  of  Political  Econ- 
omy, October,  1908. 


I 


CREDIT  IN   THE   UNITED   STATES       301 

The  notes  of  national  banks,  it  is  to  be  remembered, 
cannot  be  used  in  the  reserves  of  any  national  banks ;  but 
when  paid  out  to  the  public  they  serve  as  a  medium  of 
exchange  as  well  as  any  lawful  monev;  and, 

,  u  J  11         "  J  Purpose  of 

moreover,  tney  can  be,  and  generally  are,  used  the 
by  all  banks  outside  the  national  system  (which  ^j^t^s^^^^ 
are  over  17,000  in  number)  as  reserves.  This 
temporary  device  coined  bank  assets  of  commercial  paper 
or  securities  into  a  means  of  payment,  or  money,  accepta- 
ble for  all  general  monetary  uses.  The  tendency  of  timid 
persons,  or  small  banks,  to  draw  cash,  hoard  it,  and  thus 
cause  a  scarcity  of  money  for  the  current  needs  of  trade, 
was  fully  met  by  these  emergency  notes,  and  at  the  same 
time  the  lawful  reserves  and  the  lending  power  of  the 
banks  were  protected.  The  reserves,  however,  would  not 
have  been  protected  if  cash  were  taken  from  lawful  money 
in  the  reserves  to  buy  United  States  bonds,  or  other  se- 
curities, to  obtain  the  new  notes.  In  reality,  the  issue  of 
these  notes  did  not  increase  the  lending  power  of  the 
banks;  it  only  protected  that  power.  They  were  not  at 
bottom  a  final  payment,  but  only  a  credit  device  in  the 
form  of  money  to  be  used  in  a  brief  emergency. 

In  practice  the  Aldrich-Vreeland  notes  enabled  the 
banks  to  pay  cash  between  themselves,  as  well  as  to  cus- 
tomers demanding  money.  In  two  respects  they  proved 
to  be  superior  to  the  clearing-house  loan  certif- 

,  111  1    •  .1  Preferred  to 

icates:   tney  could  be  used  in  payments  be-     ciearing- 
tween  banks  in  different  groups  or  in  any  part     certificates 
of  the  country;  and  banks  had  to  pay  only  3 
per  cent  for  them,  as  against  6  per  cent  for  the  loan  cer- 
tificates.    Therefore,  in  spite  of  some  hesitation  in  em- 
ploying an  untried  device,  there  was  a  well-defined  dis- 
position to  take  out  the  emergency  notes  rather  than  the 
loan  certificates. 

In  spite  of  various  objections,  currency  associations  had 


302  CREDIT   OF  THE  NATIONS 

been  urged  by  the  secretary  of  the  treasury  some  time 
before   the   war,   and   were   organized   in   several   places 

mainly  in  response  to  this  urging.  When  the 
notes*used.       ^^^  broke  out  the  secretary  used  his  influence 

against  applications  for  notes  direct  from  the 
banks  to  the  Treasury;  and  in  August,  1914,  the  comp- 
troller of  the  currency  again  urged  the  banks  to  work 
through  currency  associations.  In  all,  44  associations 
were  formed,  containing  2,102  banks,  having  a  capital 
and  surplus  of  $1,197,771,001,  by  41  of  whom,  represent- 
ing 1,190  banks,  notes  were  taken  out.  By  August  19 
$154,085,000  had  been  issued;  by  the  end  of  October 
$369,558,040  were  actually  shipped;^  and  by  December  1, 
1914,  the  total  amount  issued  was  $381,530,000.  Al- 
ready the  need  for  them  was  diminishing,  and  $8,438,100 
had  been  retired  in  October.  By  November  30,  1914, 
additional  redemptions  to  the  sum  of  $120,234,419  had 
been  made;  by  the  end  of  December  the  outstanding 
issues  had  been  reduced  to  about  $150,000,000;  by  Feb- 
ruary, 1915,  retirement  had  been  virtually  completed; 
and  by  the  end  of  the  fiscal  year  (June  30,  1915)  there 
remained  out  but  $67,640,187.  Funds  for  the  retirement 
of  the  emergency  notes  were  first  received  October  22, 
1914,  and  practically  all  issues  were  cancelled  or  covered 
by  deposits  by  the  end  of  the  fiscal  year,  June  30,  1915. 
In  this  extraordinary  crisis,  exceptional  in  many  ways, 
under  a  specially  urgent  foreign  demand  on  our  gold  re- 
serves, with  a  domestic  drain  also  at  work,  exports  of 

^  Although,  as  a  means  of  encouragement,  it  was  announced  that  $500,000,000 
of  the  emergency  currency  had  been  printed,  ready  for  distribution,  in  fact  a 
large  part  of  this  amount  was  unavailable  because  printed  under  the  unamended 
law  of  May  30,  1908,  and  had  to  be  printed  anew  in  the  crisis.  The  total 
amount  authorized  to  November  30,  1914,  was  $383,301,305.  All  told,  by  the 
end  of  the  fiscal  year,  June  30,  1915,  $354,140,893  had  been  deposited  to  cover 
retirement,  or  notes  had  been  sent  in  for  cancellation  (excepting  $454,E 
Finance  Report,  1915,  p.  330. 


CREDIT  IN  THE  UNITED  STATES       303 

goods  at  a  standstill,  and  business  obligations  continually 
falling  due,  it  is  of  peculiar  interest  to  note  how  the 
banks,  aided  by  the  issue  of  clearing-house  Duration  of 
loan  certificates  and  Aldrich-Vreeland  notes,  the  credit 
were  able  to  right  the  situation  by  loans.  As 
compared  with  the  striking  changes  in  the  operations  of 
credit  in  European  banks,  those  in  the  United  States 
must  seem  mild  indeed  (see  Chart  VIII),  as  typified  by 
the  items  of  the  New  York  Clearing-House  banks.  From 
July  25  to  September  12,  or  only  about  seven  weeks,  the 
loans  continued  to  increase.  The  culmination  in  Septem- 
ber was  followed  by  a  slight  decline,  and  a  continuance 
on  a  uniform  level  somewhat  above  normal  into  the  year 
1915.  After  that  we  reached  an  adjustment  to  war  con- 
ditions which  yields  no  new  problems  and  which  for  our 
present  purpose  may  be  neglected. 

It  should  be  recalled  that  under  our  old  banking  sys- 
tem, and  quite  contrary  to  the  best  European  practice  in 
times  of  emergency,  our  banks  had  had  the  bad  habit  of 
protecting  themselves  by  drastic  contraction 

p  ,  'n    '         .1     '  .  1  T  Action  of  the 

or  loans,  sacrincmg  their  customers,  noardmg    banks  at 
reserves  by  all  possible  means,  and  thus  aggra-    ^g^^^sis 
vating  the  situation.     To  lend  freely  in  the 
teeth  of  declining  reserves,  as  a  matter  of  banking  self- 
preservation,  had  not  been  the  policy  of  banks  outside  of 
New  York.     To  modify  this  wrong  attitude  had  been  the 
aim  of  the  educative  campaign  which  led  to  the  passage 
of  the  Federal  Reserve  Act,  in  December,  1913.     The  re- 
sults appeared  in  the  management  of  the  crisis  of  1914. 
^For  the  first  time  the  national  banks  met  the  crucial  diflS- 
culties  by  lending  freely  at  the  same  time  that  the  actual 
reserves  were  falling  seriously.     From  June  27  to  August 
15   New   York   reserves   had   declined   by   $148,000,000. 
(See  Chart  VIII.)     In  the  one  week  preceding  August  8 


304  CREDIT  OF  THE  NATIONS 

the  loss  had  been  $65,000,000,  and  on  that  date  the  re- 
serves had  fallen  below  the  legal  limit  bj^  $43,116,000,  and 
they  remained  below  that  line  until  October  24,  or  eleven 
weeks.  (See  lowest  line  in  Chart  VIII.)  But  even  then, 
although  buying  from  note-brokers  was  curtailed,  there 
was  no  drastic  contraction  of  loans.  On  the  contrary, 
by  the  devices  already  described,  the  banks  very  properly 
expanded  their  loans  by  $106,700,000  between  August  1 
and  September  12.  An  unparalleled  situation  was  met 
with  courage  and  good  banking  judgment  and  at  no  time 
was  there  a  panic.  The  rates  of  discount,  which  usually 
measure  the  intensity  of  a  crisis,  were  never  at  panic 
heights  during  August  and  September.  Call-loans  ran 
from  6  to  8  per  cent,  but  were,  of  course,  not  literally  call- 
loans  while  the  exchange  was  closed.  Commercial  paper 
ruled  at  about  7  per  cent,  but  by  September  at  about  6  per 
cent.  During  this  same  period,  taking  the  national  banks 
as  a  whole,  they  came  into  the  possession  of  miscellaneous 
securities  (other  than  United  States  bonds)  to  secure  cir- 
culation amounting  to  $392,663,116,  which  enabled  them 
to  extend  credit.  In  these  eleven  weeks  the  total  national 
bank  circulation  was  increased  by  $195,715,596. 

Although  the  Aldrich-Vreeland  notes  were  a  demand 
obligation  of  the  bank  issuing  them,  they  required  only  a 
5  per  cent  reserve  in  the  redemption  fund;  but  as  they 
were  paid  out  to  the  public,  they  would  return 
by  credit;  to  banks  as  dcposits  against  which  at  that 
notes  time  reserves  of  15  to  25  per  cent  had  to  be 

secondary.  ^ 

kept.  Eventually  they  would  move  to  the 
centres  of  largest  trade,  where  they  would  normally  be 
sorted  and  sent  in  for  redemption.  If  the  emergency 
notes  were  soon  forced  to  redemption  there  would  thus 
be  given  a  test  as  to  whether  there  had  been  any  inflation 
or  not.     Whenever,  in  the  judgment  of  the  public,  there 


CREDIT  IN  THE  UNITED  STATES       305 

were  more  notes  out  than  were  needed,  they  would  be 
sent  in  for  redemption,  which  would  furnish  an  automatic 
remedy  against  inflation  of  the  currency.  The  banks 
took  out  the  notes  largely  for  protection,  to  meet  de- 
mands of  depositors  or  of  money  for  shipment  to  the  in- 
terior. The  demands  of  interrupted  trade  and  industry 
were  not,  in  the  main,  for  more  currency,  but  for  more 
loans  at  the  banks.  Since  markets  for  some  important 
goods  were  closed  by  the  war,  and  time  was  required  for 
the  readjustment  between  producers  and  buyers,  credit 
served  its  legitimate  purpose  in  providing  means  of  pres- 
ent payment — in  notes,  or  deposit  accounts,  according  to 
the  wish  of  the  borrower — so  that  solvency  was  main- 
tained, industries  kept  active,  unemployment  checked,  the 
general  productive  power  of  the  country  preserved,  until 
the  first  squall  blew  over  and  the  sails  could  be  adjusted 
to  the  new  conditions  of  war.  In  about  three  months 
the  process  of  readjustment  had  begun,  and  the  pres- 
sure for  loans  had  begun  to  weaken.  Recovery  had  set  in. 
The  slackening  in  the  demand  for  credit,  however,  was  not 
synchronous  with  the  lessening  demand  for  notes.  The 
culminating  need  for  loans  came  in  September,  while  the 
volume  of  notes  kept  on  increasing  until  the  end  of  Octo- 
ber, showing  more  or  less  of  a  separation  of  function  be- 
tween loans  and  notes  in  allaying  the  trials  of  a  crisis. 
Credit  had  successfully  carried  the  country  over  the  un- 
usual emergency,  until  the  movement  of  goods  began 
again.  The  real  relief  came  only  when  merchandise  again 
found  markets.  By  February  and  March,  1915,  the  ad- 
justment of  credit  to  a  war  basis  was  well  under  way. 
There  was  a  perceptible  feeling  of  encouragement  in  our 
domestic  trade  in  April  and  May,  1915;  but  after  the 
great  crops  of  1915  were  harvested,  the  country  entered 
on  a  period  of  great  industrial  prosperity. 


306  CREDIT  OF  THE  NATIONS 

§  4.  Inasmuch  as  the  crisis  was  caused  by  the  up- 
heaval in  our  foreign  trade  brought  about  by  the  war,  a 
study  of  the  trade  situation  will  give  us  a  better  insight 
into  the  conditions  of  credit  and  bring  with  it  an  under- 
standing of  the  means  by  which  a  remarkable  recovery 
was  made,  to  be  followed  by  a  wholly  unexpected  and 
phenomenal  prosperity.  As  the  falling  off  of  exports  first 
plunged  us  into  despair,  so  the  later  increase  of  exports 
yielded  us  a  miraculous  good  fortune.  The  whole  story 
is  told  in  Chart  VII. 

One  of  the  drastic  effects  of  the  war  appears  in  its  in- 
fluence on  consumption.  There  was  an  early  and  gen- 
eral decline  in  the  consumption  of  all  goods  except  war 
supplies.  Indeed,  the  war  presents  a  most 
war  on  significant  study  in   phases  of  changed  con- 

consumption     sumptiou.     In  somc,  demand  has  been  shifted 

and  imports.  .  . 

without  causing  unemployment;  or,  in  others, 
entirely  stopped,  entailing  a  readjustment  of  production. 
Almost  instinctively  people  began  to  economize.  Apart 
from  its  result  in  an  increase  of  capital,  reduced  con- 
sumption also  tended  to  reduce  our  imports.  But  obvi- 
ously the  decline  in  imports  was  mainly  due  to  changed 
conditions  within  the  countries  from  which  our  imports 
had  come.  Both  forces  were  at  work.  In  1914-1915,  as 
compared  with  the  previous  fiscal  year,  imports  of  articles 
which  were  not  decisively  necessary,  such  as  laces,  art 
works,  silks,  and  precious  stones,  showed  a  decrease  of 
$129,000,000;  while  commodities  whose  production  in  bel- 
ligerent countries  had  been  interfered  with  by  the  war, 
such  as  breadstuffs,  chemicals,  dyestuffs,  manufactures  of 
copper,  fertilizers,  fibres,  and  hides  and  skins  declined  by 
$159,900,000.^     On  the  other  hand,  the  stoppage  of  the 

'  C'J.  an  admirable  statistical  study  by  L.  C.  Sorrell,  "Dislocations  in  the 
Foreign  Trade  of  the  United  States  Resulting  from  the  European  War,"  Jour- 
nal of  Political  Economy,  January,  1916. 


CREDIT  IN  THE  UNITED  STATES       307 

beet-sugar  exportation  from  Europe  stimulated  the  im- 
portation of  cane-sugar  from  Cuba.  Sugar,  india-rubber, 
wool,  meat,  and  dairy  products  caused  an  increase  in 
imports  of  $112,500,000  (of  which  sugar  made  up  $72,- 
300,000) .  The  severe  decline  in  imports  of  August,  1914, 
was  followed  by  a  slight  recovery  (due  to  orders  placed 
before  the  war)  in  the  next  two  months;  but  the  Decem- 
ber imports  were  the  lowest  in  five  years.  The  loss  in 
1914-1915  from  six  belligerents  was  $259,700,000,  offset 
by  a  gain  of  $83,000,000  from  Cuba  and  Argentina.^ 
Including  all  countries,  there  was  a  net  decrease  of  $220,- 
000,000.  The  loss  from  Great  Britain  was  chiefly  in  tex- 
tiles, tin,  wool,  and  precious  stones;  from  France,  in  art 
works,  silks,  cotton  goods,  and  wines;  from  Russia,  in 
hides  and  wool;  from  Belgium  in  hides,  rubber,  and  pre- 
cious stones.  The  greatest  loss  was  from  Germany, 
chiefly  in  colors  and  dyes,  dressed  and  undressed  furs, 
leather  gloves,  toys,  chinaware,  cotton  goods,  hides  and 
skins,  rubber,  and  tin.  In  view  of  later  events,  it  is 
worth  noting  that  imports  from  Germany  to  us  recovered 
after  August,  1914,  and  reached  nearly  normal  propor- 
tions in  January,  1915.  By  the  middle  of  1915,  however, 
they  had  almost  ceased.  Looking  over  the  course  of 
imports  as  a  whole  before  the  war  and  then  to  the  end 
of  the  third  year,  we  find  they  rose  in  1915  to  about  the 
normal  level  of  $150,000,000  per  month;  but  since  then 
they  have  gone  up  to  twice  that  amount,  reflecting  some- 

^  Decrease  in  imports  in  1914-1915  [in  millions]  from: 

Belgium $30.8 

France 64 . 3 

Great  Britain 37.3 

Russia 18.3 

Germany 98 . 6 

Austria-Hungary 10.4 

$259.7 
Sorrell,  ibid.,  pp.  31,  60-61. 


308  CREDIT  OF  THE  NATIONS 

what  the  influence  of  exceptionally  large  exports.     If  we 
have  sold  more  largely,  we  have  bought  more  largely. 

In  turning  to  our  exports  of  goods,  we  find  the  ex- 
planation of  credit  operations  which  could  not  otherwise 
be  understood.     Unlike  imports,  which  show  no  seasonal 

irregularity,  exports  (see  Chart  VIII)  in  past 
iifexports.       years  have  quite  uniformly  dropped  to  a  low 

point  in  July  and  risen  to  a  peak  in  October 
and  November,  due  undoubtedly  to  the  seasonal  char- 
acter of  our  chief  articles  for  export,  cotton  and  bread- 
stuffs.  As  we  have  already  seen,  the  outbreak  of  war 
immediately  reduced  our  exports  of  goods.  In  August 
they  fell  to  $108,000,000,  the  lowest  point  in  many  years, 
producing  great  difficulties  with  the  foreign  exchanges 
and  the  need  of  gold.  There  could  be  no  return  to  sound 
credit  merely  by  shipping  gold.  A  recovery  could  come 
only  when  exports  of  goods  began  to  move  in  sufficient 
volume.  The  time  when  the  pressure  for  loans  began 
to  slacken  is  synchronous  with  the  increase  of  our  exports 
in  September  and  October.  (See  Chart  VIII.)  The  in- 
ternational trade  balance,  which  in  August,  1914,  was 
$19,400,396  against  us,  turned  in  our  favor  in  September 
by  $16,341,722,  in  October  by  $57,305,074,  in  November 
by  $79,299,417,  in  December  by  $131,863,077,  in  January, 
1915,  by  $145,536,103,  and  in  February  by  $173,604,366. 

By  December,  1914,  exports  had  reached  the 
phenomenally,  normal   level;   after   that   they   reversed   the 

usual  direction  and  began  to  climb  to  a  high 
point  in  February,  1915.  (See  Chart  VII.)  In  this  pe- 
riod the  whole  sky  in  trade  and  credit  began  to  brighten. 
As  the  war  brought  the  storm  in  August,  so  it  brought 
the  clearing  of  the  skies  in  November. 

The  early  recession  in  exports,  cut  off  by  war,  appears 
in  the  classes  of  agricultural  implements,  manufactures 


CREDIT  IN  THE  UNITED  STATES       309 

of  copper,  manufactures  of  iron  and  steel,  wood  and  its 
manufactures,   and   notably   in   cotton.     The  decline  in 
these    five   groups  of  exports  was,   in   1914-      Goods  not 
1915,  $381,300,000  over  the  previous  year,  of      exported  as 

before 

which  $234,000,000  was  due  to  cotton  alone. 
Wood  and  its  manufactures  quickly  dropped  to  50  per 
cent  of  normal  in  August,  1914;  the  same  was  true  of 
manufactures  of  copper,  but  soon  they  gradually  in- 
creased; breadstuff s  and  iron  and  steel  groups  fell  off  in 
August,  but  began  a  steady  rise  thereafter. 

Cotton  occupied  a  peculiar  position.  It  was  the  one 
commodity  normally  in  demand  by  Europeans  to  about 
9,000,000  bales,  and  which  at  10  cents  a  pound  had  an 
export  value  of  $450,000,000,  thus  providing 
to  that  extent  bills  on  Europe.  Moreover,  we 
happened  to  have  in  1914  a  record-breaking  crop  of 
16,134,930  bales.  The  chief  market  for  our  raw  cotton 
had  been  in  England,  Germany,  France,  and  Belgium. 
When  the  war  broke  out,  it  was  assumed  that  the  de- 
mand for  it  would  be  entirely  cut  off.  In  fact,  the  ex- 
ports of  cotton  in  August,  1914,  were  only  21,210  bales, 
valued  at  $1,306,117,  as  against  257,168  bales,  valued  at 
$16,518,569  in  August,  1913;  indeed,  during  1914-1915 
there  was  a  decline,  as  compared  with  the  previous  year, 
of  $234,000,000.  Assuming  no  foreign  demand,  and  a 
home  consumption  of  only  6,000,000  bales,  there  would 
have  been  a  surplus  from  the  new  crop,  counting  the  hold- 
over from  the  preceding  year  of  2,000,000  bales,  of  nearly 
12,000,000  bales  (500  pounds  to  the  bale).  Supposing 
only  a  partial  decline  in  the  foreign  demand,  it  was  esti- 
mated that  a  surplus  of  4,500,000  bales  would  have  to  be 
carried  to  the  future.  Consequently,  with  the  drop  of  ex- 
ports in  August,  cotton  fell  from  IO3/2  cents  to  73^^  cents 
per  pound,  or  even  less.     When  it  is  recalled  that  the 


310  CREDIT  OF  THE  NATIONS 

Southern  planter  is  supplied  with  seed  and  materials  be- 
forehand on  a  credit  to  be  paid  out  of  the  proceeds  of 
the  crop  when  sold,^  and  that  a  whole  series  of  claims  from 
the  supply  stores,  the  jobbers,  the  exporters,  to  the  banks 
that  have  loaned  on  the  cotton,  would  be  made  unliquid 
by  the  inability  to  market  the  crop  at  usual  prices,  it  can 
be  realized  how  vividly,  in  the  face  of  the  greatest  crop 
ever  known,  ruin  showed  up  before  the  cotton  States. 
The  decline  of  $10  a  bale  in  the  week  ending  August  1 
brought  on  the  failure  of  three  cotton  brokerage  houses, 
and  on  July  31  the  Cotton  Exchange  was  closed.  There- 
after there  were  no  means  of  determining  prices,  of 
arriving  at  the  value  of  existing  contracts,  or  of  market- 
ing cotton  as  usual.  The  cotton  factor,  or  the  spinner, 
was  thus  deprived  of  the  means  of  carrying  cotton  for 
future  contracts  or  for  coming  needs  at  prices  in  proper 
proportion  to  the  finished  goods  sold.  Of  course  New 
England  cotton-mills,  as  well  as  the  buyers  of  cotton 
goods,  bought  little  so  long  as  the  price  of  cotton  was  un- 
settled. The  light  demand  and  the  enormous  crop  to- 
gether ran  down  the  price.  Then  followed  a  sentimental 
buy-a-bale-of-cotton  campaign,  which  had  no  effect  in 
raising  the  price. 

The  demoralization  in  the  cotton  market  was  met  by 
an  interesting  example  of  co-operation  after  the  exchange 
was  closed.  Under  contracts  outstanding  July  31  dealers 
ReUef  ^^^  agreed  to  receive  about  400,000  bales  at 

for  Cotton        the    old    prices,    and    faced    losses    of    about 
$6,000,000.      Thereupon   the   exchange   itself 
assumed  the  losses  below  9  cents,  amounting  to  about 
$3,000,000.     The  Cotton  Trading  Corporation  was  formed 

'  It  cost  the  producer  of  cotton,  in  wages  and  materials,  about  $15  a  bale  (or 
3  cents  per  pound)  to  pick,  gin,  and  pack  the  cotton.  This  somewhat  measures 
the  advances  made  by  credit.     The  cost  of  production  is  estimated  at  93^  cents. 


CREDIT  IN  THE  UNITED  STATES       311 

to  take  over  the  contracts  at  this  price.  It  made  pay- 
ment for  one-half  in  three-year  notes,  and  one-half  in 
cash  provided  by  fifteen  New  York  banks  on  paper  in- 
dorsed by  leading  members  of  the  exchange.  The  liqui- 
dation of  the  $3,000,000  was  insured  by  a  tax  on  new 
business  executed  on  the  exchange,  and  the  personal 
means  of  the  indorsers.  Then  a  syndicate  was  organized 
to  buy  this  cotton  from  the  trading  corporation  at  1}/^ 
cents  per  pound.  In  this  way  the  old  contracts  were 
cleared  off  and  the  losses  settled.  So  that  the  Cotton 
Exchange  was  opened  November  16,  1914,  with  cotton 
at  73/^  cents. 

Meanwhile  buyers,  both  for  export  and  domestic  pur- 
poses, were  very  cautious.  Fearing  the  effects  of  such 
a  crisis  on  the  general  business  of  the  cotton  States,  it 
was  proposed  on  October  24   to  establish  a      _  ^ 

„        ,       „    ^  ,  Cotton  pool. 

cotton  pool,^  or  fund  of  $135,000,000,  to  be 

loaned  on  cotton  in  warehouses  on  a  basis  of  6  cents  per 

pound   (for  middling).     Of  this  fund  $100,000,000  was 

*  For  details  of  the  plan,  see  Report  of  Secretary  of  Treasury,  1914,  pp.  66-68: 

There  were  two  classes  of  subscriptions  to  the  fund.  The  first,  designated  as 
Class  A,  to  aggregate  $100,000,000,  and  the  second.  Class  B,  $35,000,000,  to  be 
subscribed  by  banks  and  others  in  the  cotton-producing  States. 

A  bank  in  a  cotton  State  wishing  to  make  a  loan  to  one  of  its  customers  for, 
say,  $10,000,  would  advance  out  of  its  own  funds  25  per  cent,  or  $2,500,  and 
receive  from  the  cotton  pool  75  per  cent,  or  $7,500.  As  security  for  its  25  per 
cent  of  the  loan  the  Southern  bank  would  receive  Class  B  certificates,  while  the 
pool  would  retain  Class  A  certificates.  The  lending  bank,  however,  had  to  pay 
3  per  cent  of  the  entire  loan,  or  $300,  into  the  pool,  to  cover  possible  losses 
and  to  meet  expenses. 

In  effect,  with  loans  made  up  to  5  cents  a  pound.  Class  A  certificates  would 
be  secured  by  cotton  on  a  basis  of  3^4  cents  a  pound;  Class  B  by  Ij^  cents. 
The  two  classes  were  equivalent  to  first  and  second  mortgages  on  the  ware- 
housed cotton. 

The  loans  bore  6  per  cent,  and  ran  one  year,  with  provision  of  renewal  for 
another  six  months  on  approval  of  the  central  committee  in  the  Federal  Reserve 
Board,  charged  with  its  management. 

It  was  argued  against  the  plan  that  it  was  a  violation  of  the  anti-trust  laws 
as  an  agreement  to  sustain  the  price  of  cotton. 


312  CREDIT  OF  THE  NATIONS 

subscribed  by  non-cotton  States.  The  loans  were  in- 
tended to  enable  producers  to  withdraw  cotton  from  the 
market,  thus  limit  the  supply,  and  hold  it  until  the  emer- 
gency should  pass.  The  last  day  for  making  applications 
for  such  loans  was  February  1,  1915,  when  only  $28,000 
had  been  demanded.  The  total  fund  was  subscribed, 
without  enthusiasm;  but  the  restrictions  upon  the  banks 
in  the  cotton  States  that  subscribed  the  $35,000,000 
were  such  that  the  loans  would  not  be  granted  except  in 
extremis.  In  fact,  the  cotton  pool  was  not  called  upon 
to  any  extent,  and  the  subscribers  were  never  asked 
for  any  payment.  It  might  have  been  very  necessary; 
but  in  October  exports  of  cotton  began  to  move;  by 
January,  1915,  they  were  normal  in  amount;  and  from 
February  they  steadily  exceeded  the  exports  of  other 
years.  In  January  cotton  sold  at  9  cents,  and  in  Febru- 
ary at  nearly  10  cents,  per  pound.  Thus  the  cotton  crisis 
ended.  The  pressure  for  loans  was  removed,  and  the  ex- 
ports provided  bills  for  international  payments.  In  the 
next  year,  however,  the  Allies  declared  cotton  to  be  con- 
traband, in  order  to  cut  off  Germany's  supply  for  making 
munitions,  and  there  was  more  or  less  of  a  problem  cre- 
ated for  our  diplomats ;  but  cotton  has  since  risen  in  price 
and  our  entry  into  the  war  finally  quieted  that  excitement. 
Following  the  example  of  cotton,  the  exports  of  manu- 
factures of  iron  and  steel  fell  off.  But  variability  is  a 
characteristic  of  this  industry.  Since  January,  1914,  be- 
fore the  war,  exports  of  iron  and  steel  had 

Iron  and  t  i     i  j.i  e  •  t'T- 

steel.  been  below  those  or  previous  years.     1  here- 

fore,  the  war  only  added  to  the  depression,  so 
that  the  exports  of  August  and  September  had  fallen  50 
per  cent  below  the  figures  for  corresponding  months  in 
previous  years.  Then  came  a  slow  gain,  until  normal 
was  almost  reached  in  January;  but  the  high  export  fig- 


CREDIT  IN  THE   UNITED  STATES       313 

ures  were  not  attained  until  June,  1915  (due  mainly  to 
metal-working  machinery,  firearms,  and  wire).  In  that 
month  exports  of  manufactures  of  iron  and  steel  led  the 
list,  exceeding  even  wheat  and  flour. 

The  recovery  from  the  shock  of  war  was  aided  by  the 
increase  of  exports  in  thirteen  other  groups  of  commodi- 
ties, which  showed  in  1914-1915  a  gain  over  the  previous 
year  of  $809,500,000,  of  which  breadstuffs  to   increased 
the   amount  of   $506,000,000    (wheat,   wheat   exports  of 
flour,   oats,   corn,   barley,   and   rye),   leather 
goods  (sole  leather,  harness,  saddles,  boots,  and  shoes), 
meat  and  dairy  products  (canned  and  fresh  meat  and  ba- 
con), and  horses  furnished  the  largest  gains.     These  ar- 
ticles began  to  go  abroad  from  October  to  January  in  in- 
creasing amounts.     Then,  in  addition,  shipment  began  of 
commodities  never  before  exported  in  large  quantities, 
such  as  sugar,  woollen  goods,  manufactures  of  brass  and 
zinc,  and  explosives. 

In  general,  the  increased  exports  went  to  Great  Britain, 
France,  and  Italy,  and  to  the  neutrals,  Holland,  Denmark, 
and  Scandinavia.^     Those  to  France  and  Italy  more  than 
doubled,  and  those  to  Great  Britain  grew  by 
more  than  a  half,  in  1914-1915.     The  extraor-        taking 
dinary  increase  in  exports  to  the  neutral  Eu-        ^"onT^ 
ropean  countries  is  significant,  being  due,  no 
doubt,  to  their  inability  to  obtain  the  usual  imports  from 
the  Central  Powers,  as  well  as  to  their  desire  to  obtain  our 
goods  for  sale  to  the  same  powers.     While  we  were  not 

^  France  and  Great  Britain  jointly  account  for  83.4  per  cent  of  the  increased 
exports  of  automobiles,  88.9  per  cent  of  meats,  46.7  per  cent  of  wheat.  Italy 
alone  (not  yet  in  the  war)  accounts  for  26.2  per  cent  of  the  increase  of  wheat. 
Wheat,  cotton,  and  manufactures  of  copper,  for  76.9  per  cent  of  increased  ex- 
ports to  Italy,  and  for  68.8  per  cent  of  the  decrease  to  Germany.  Breadstuffs 
form  60.8  per  cent  of  the  increase  to  Holland.  Horses,  wheat,  automobiles,  and 
meat  account  for  60.6  per  cent  of  the  increase  to  France,  and  38.7  to  Great 
Britain.     Sorrell,  ibid.,  pp.  56-60. 


314  CREDIT  OF  THE  NATIONS 

in  the  war,  Germany  obtained  cotton,  copper,  foodstuffs, 
and  other  supplies  from  us  in  large  quantities  through 
the  neutrals.  After  March,  1915,  our  exports  directly  to 
Germany  practically  ceased.^ 

After  there  had  come  some  adjustment  to  war  condi- 
tions, it  was  believed  that  this  country  would  gain  largely 
in  its  business  of  supplying  the  demands  of  belligerents. 
The  great  increase  in  our  exports  of  food,  cot- 

Our  need  for      ,  j  j  e  •      i.'n    j    l.^.    i. 

materials.  '^o^'  ^^^  ^^^  goods,  oi  course,  justmed  that 
belief.  But  our  ability  to  export  or  even  to 
supply  domestic  wants  depended  very  much,  in  certain 
lines  of  production,  upon  obtaining  necessary  materials 
from  Europe.  We  needed  their  dyes  for  textiles,  man- 
ganese for  steel,  platinum  from  Russia  and  carbons  and 
filaments  from  Germany  for  the  electrical  industries. 
We  had  depended  on  Germany  for  such  drugs  as  citric, 
tartaric  and  carbolic  acid,  and  camphor;  oxalic  acid  in 
photography;  cyanide  of  potassium  in  the  reduction  of 
gold,  and  potash  for  making  glass,  soap,  matches,  gun- 
powder, and  fertilizers.  Eventually  the  making  of  many 
dyes  from  coal-tar  has  become  an  established  success  in 
the  United  States.'^  Manganese  has  been  supplied  from 
England,  India,  and  South  America.  Potash  and  cyanide, 
although  obtained  more  cheaply  from  deposits,  can  be 
manufactured. 

It  might  have  been  supposed  that  American  merchants, 
when  our  trade  with  Europe  was  interrupted,  would  suc- 
ceed in  taking  over  the  trade  of  the  belligerents,  especially 
of  Germany,  in  South  America  and  elsewhere,  which  had 
been  lost  to  them  on  the  outbreak  of  war.     The  building 


1  Cf.  charts  by  Sorrell,  ibid.,  pp.  35-36. 

*The  chemical  and  dye  question  is  involved  with  that  of  explosives,  since 
coal-tar  yields  also  benzol,  toluol,  naphthol,  anthracene,  carbazol,  and  other 
ingredients. 


CREDIT  IN  THE  UNITED   STATES       315 

up  of  trade  with  South  America,  however,  has  been,  in 
fact,  slow  and  difficult.  These  countries,  being  young,  are 
as  yet  mainly  engaged  in  developing  their  nat- 
ural resources  for  which  they  lack  capital.  Pre-  i^tics^of*'' 
viously  they  had  obtained  English  and  German  South 
capital.  It  is  estimated  that  the  English  who  trade, 
came  first  have  invested  some  $5,000,000,000 
in  South  America.  The  European  War  cut  off  these  sup- 
plies and  the  business  of  these  borrowers  was  paralyzed. 
Not  able  to  maintain  production  on  the  old  scale,  their 
purchasing  power  was  correspondingly  reduced.  If  the 
United  States  were  to  acquire  their  trade  it  must  not  only 
provide  the  expected  capital,  but  it  must  also  be  willing  to 
lend  it  on  the  terms  customary  in  South  America.  Since 
the  funds  would  be  needed  to  sustain  operations  in  agri- 
culture and  in  turning  out  war  materials,  in  which  the  pe- 
riod between  the  inception  and  the  completion  of  produc- 
tion is  long,  credits  were  demanded  on  terms  to  continue 
until  goods  could  be  sold.  Such  loans,  therefore,  were  not 
of  the  sort  to  be  taken  by  strictly  commercial  banks.  This 
was  patent,  especially  to  our  banks  in  the  Federal  Re- 
serve system,  the  first  aim  of  which  was  to  encourage 
and  accept  only  short-term  commercial  paper.  German 
banks,  organized  for  foreign  business  and  to  finance  new 
enterprises,  were  not  confined  to  commercial  banking. 
They  accepted  long-term  credits,  took  risks,  and  expanded 
their  operations  in  a  way  not  customary  to  banking  in 
this  country.  Not  only  were  overdrafts  common;  but  in 
South  America,  real-estate  security  was  regarded  as  a  sat- 
isfactory bank  asset. 

When  the  war  came.  South  American  money  markets 
were  hard  hit.  If  the  springs  of  credit  are  shut  off,  the 
main  current  of  trade  is  dried  up.  Could  we  make  a 
connection  between  their  needs  and  our  reservoirs  of  cap- 


316  CREDIT  OF  THE  NATIONS 

ital?     The  answer  was  not  an  easy  one.     We  had  been, 

in  the  past,  buying  more  from  South  America  than  she 

took  from  us.     In  August,  1914,  our  exports 

War  catased      |.q  |.jjg  southern  continent  fell  to  one-third  of 

difficulties  in  .  x      /^        i 

our  trade  the  Same  month  m  1913.  In  October  our  ex- 
America!*^  ports  to  Argentina  and  Brazil  had  fallen  in 
the  same  proportion.  The  latter  country 
had  been  overexpanded  before  the  war,  brought  to  a 
halt  in  1913,  and  plunged  into  a  banking  crisis  in  the 
early  part  of  1914.  A  bad  situation  was  so  aggravated 
by  the  war  that  she  was  led  to  pass  a  general  moratorium 
and  to  issue  such  large  amounts  of  government  paper 
money  that  it  depreciated  25  per  cent.  Obviously,  coun- 
tries in  such  a  condition  could  not  be  expected  to  respond 
to  our  advances  for  a  larger  trade  with  them.  There  was 
an  increase  in  the  risks  of  lending  to  South  America,  not 
only  because  the  local  monetary  conditions  made  the 
quality  of  the  means  of  payment  uncertain,  but  because 
the  resort  to  moratoria  rendered  obligations  unliquid  for 
a  considerable  period.  Inasmuch  as  they  l\ad  depended 
mainly  on  customs  duties  to  support  their  governments, 
the  cessation  of  trade  reduced  their  income,  made  it 
difficult  to  pay  interest  on  national  debts,  and  led  to 
unfortunate  issues  of  paper  money.  It  was  no  wonder, 
then,  that  expectations  of  an  increasing  trade  with  South 
America  early  in  the  war  were  disappointed. 

The  continuance  of  the  war,  however,  and  the  ex- 
traordinary growth  of  capital  in  the  United  States  prac- 
tically forced  us  into  closer  relations  of  trade  and  credit. 
There  was  no  other  resort  for  South  America  but  to  our 
supplies  of  capital.  Furthermore,  we  needed  her  wool, 
hides,  nitrate  of  soda,  and  her  copper;  and  she  began  to 
take  from  us  in  increasing  quantities  automobiles,  coal, 
cotton  goods,  implements,  and  tin-plate.     Gradually  and 


CREDIT  IN  THE  UNITED  STATES       317 

inevitably  our  trade  developed  in  the  following    fiscal 
years: 


Imports    into 
United  States 

Exports  from 
-  United  States 

1914 

1915 

1916 

1917 

222.6 
261.5 
391.5 

542.2 

124.5 

99.3 

180.1 

259.6 

The  importance  of  the  increase  in  this  trade  resides  in 
the  fact  that  the  goods  exchanged  are  not  munitions  of 
war,  and  are,  therefore,  more  likely  to  be  traded  in 
after  peace  comes.  The  trade,  however,  still  remains 
somewhat  one-sided.  We  are  not  able  to  pay  for  our 
imports  by  exports  of  goods.  On  the  merchandise  ac- 
count in  these  years  we  owed  South  America  $754,000,000. 
By  selling  her  raw  products  to  us  she  is  able  to  meet  obli- 
gations falling  due  in  Europe,  since  we  can  use  our  large 
balance  in  Europe  to  pay  European  creditors  of  South 
America.  The  adjustments  of  this  trade,  moreover,  have 
given  rise  to  interesting  problems  in  foreign  exchange, 
and  to  an  ambitious  hope  for  "dollar  exchange."  The 
total  trade  of  South  America  is  large,  and  the  business 
in  bills  drawn  on  the  movement  of  wool  and  staple  goods 
to  the  various — even  though  changed — markets  of  the 
world  is  important  and  eagerly  competed  for.  Discount- 
ing of  such  biUs  is  a  part  of  legitimate  commercial  bank- 
ing on  short-term  paper. 

The  wide-spread  effects  of  the  prodigious  upheaval  in 
our  foreign  trade  have  upset  all  calculations  regarding 
credit,  the  foreign  exchanges,  and  the  balance  of  trade. 
It  will  be  noticed  that,  at  the  outbreak  of  war,  imports 
continued  to  fall  even  after  exports  began  to  climb.  (See 
Chart  VII.)    Europe  had  been  taking  from  us  chiefly  food- 


318 


CREDIT  OF  THE  NATIONS 


stuffs  and  raw  materials,  and  had  been  sending  us  mainly 
manufactured  articles.  Our  exports  were  of  a  sort  which 
^.        .  were    necessaries    to    the    belligerents,    while 

Change  in  ^  . 

leading  most    of    our    imports    could     be    dispensed 

®^°  ^'  with  in  an  emergency.     For  this  reason  our 

imports  declined  while  our  exports  rose.  But  later  our 
imports  rose  to  an  unprecedented  level,  evidently  related 
in  some  distant  way  to  the  exceptionally  large  exports. 
The  increase  in  the  imports  in  1916-1917  was  due  to  the 
buying  for  the  most  part  of  raw  materials  entering  into 
the  production  of  oiy  exports,  such  as  gums,  crude 
chemicals,  copper-ore,  cotton,  jute,  manila,  sisal,  and 
other  fibres,  hides  and  skin^,  rubber,  raw  silk,  and  wool. 
Doubtless  for  a  time  Europe  bought  from  us  less  raw 
materials,  but  more  of  foodstuffs  and  finished  products, 
because  of  the  scarcity  of  her  labor  force.  The  exports 
by  us  of  finished  manufactured  goods  (which  included 
munitions)  was  nearly  a  billion  dollars  greater  in  1917 
than  in  1916,  and  manufactures  for  further  use  half  a 
billion  greater.  These  commodities  show  a  greater  in- 
crease than  foodstuffs;  although  the  latter  rose  in  amount 
earlier  than  the  former.  The  demand  for  munitions  con- 
tinued in  force  and  outstripped  foodstuffs.  In  1914  cot- 
ton exports  led;  in  1915  breadstuffs;  in  1916  and  1917 
manufactures  of  iron  and  steel.^ 

^  The  groups  showing  a  great  increase  of  exports  in  the  first  three  fiscal  years 
of  the  war  are  as  follows  (in  milljons  of  dollars) : 


1915 

1916 

1917 

573 
376 
225 

99 
120 
220 

41 

435 
374 
621 
173 
146 
290 
467 

589 
543 
1,129 
322 
153 
404 
802 

Cotton  (raw) 

Iron  and  steel  and  manufactures . 

Copper  and  manufactures 

Leather  and  manufactures 

Meat 

Explosives     

In  these  groups  there  would  be  the  greatest  readjustments  when  peace  comes. 


CREDIT  IN   THE   UNITED   STATES       319 

In  order  to  study  the  bearing  of  the  modifications  in  our 
foreign  merchandise  trade  upon  the  foreign  exchanges^  and 
credit  we  may  sum  up  the  general  results  of  the  balance 
of  trade  in  fiscal  years  as  follows  (in  millions  of  dollars) : 


Year 

Exports 

Imports 

Excess  of 
Exports 

1913 

2,465 
2,364 

1,813 
1,894 

652 
470 

1914 

1915 

2,768 
4,334 
6,293 

1,674 
2,1198 
2,659 

1,094 
2,136 
3,634 

1916 

1917 

Totals  for  1915-1917 

13,395 

6,531 

6,864 

In  these  last  three  years  the  excess  of  our  exports  was 
itself  larger  than  all  our  imports;  the  balance  in  our  favor 
was  more  than  ten  times  as  great  as  in  a  normal  year  like 
1913;  in  fact,  more  than  all  our  securities  held  abroad; 
or  more  than  twice  as  large  as  the  debt  incurred  in  our 
Civil  War.  It  is  a  remarkable  display  of  economic 
power  in  contrast  to  the  alarm  and  depression  of  1914; 
and  a  basis  for  estimating  our  capacity  for  service  in 
entering  the  war  against  Germany. 

§  5.  The  studies  already  made  have  prepared  us  to 
take  up  some  of  the  mfluences  which  have  produced  the 
remarkable  and  unexpected  oscillations  in  our  foreign  ex- 
changes. Never  in  our  history  have  they  showed  the 
operations  of  credit  on  such  a  scale,  or  in  such  surprising 
contrasts.  These  amazing  jumps  from  high  to  low  quota- 
tions in  the  international  medium  of  credit  could  not  be 
explained  without  a  full  understanding  of  the  movements 
of  goods,  of  securities,  and  of  gold  to  and  from  the  United 
States.  We  have  found  goods  to  be  the  main  basis  and  ex- 

1  Cf.  infra,  pp.  336,  341. 


320  CREDIT  OF  THE  NATIONS 

plication  of  credit;  and  we  have  given  due  attention  to  the 
extraordinary  upheaval  in  the  movement  of  goods.  Next 
to  goods,  however,  securities  have  the  most  importance 
among  the  items  making  up  the  international  account. 

We  have  already  referred  to  the  large  amount  of  our 
securities*  which  were  held  in  Europe  before  the  war. 
After  subtracting  those  returned  to  us  since  the  Balkan 
Checks  on  Wars,  it  seems  that  European  holdings  in  1914 
sale  of  must  havc  been  somewhat  less  than  $6,000,- 

000,000.  In  July  there  was  heavy  selling 
here;  but  this  was  held  up  by  the  closing  of  the  stock 
exchange  (July  31)  to  prevent  ruinous  liquidation  when 
other  means  of  international  payment  were  in  abeyance. 
Obviously,  the  opening  of  the  exchange  had  to  wait  on 
the  movement  of  goods  and  the  readjustment  of  the 
market  for  foreign  bills.  In  the  period  of  suspension  of 
stock  transactions  outside  dealings  could  not  be  entirely 
prevented;  but  loans  on  collateral  could  be  carried  at  the 
quotations  of  July  30  by  the  banks  so  long  as  no  lower 
quotations  regarded  as  those  of  an  official  market  were 
published.  Of  contracts  outstanding  in  New  York  on 
July  31  about  $100,000,000  were  settled  by  mutual  con- 
sent in  the  seven  weeks  to  September  22,  and  this  load 
was  taken  from  the  market.  Pressure  for  some  further 
means  of  selling  and  buying  was  strong.^  On  August  12 
members  were  permitted  to  buy  listed  stocks  for  cash  at 
prices  not  below  the  closing  prices  of  July  30  through  a 
committee  of  the  exchange,  and  could  also  sell  on  the  same 
restrictions  of  price  if  shown  to  be  necessary  to  relieve 
themselves  or  their  customers.  On  September  9  listed 
bonds  could  be  disposed  of  under  supervision  at  minimum 

'  The  curb  market  in  New  Street  had  begun  operations  by  August  11,  and 
some  stocks,  Uke  United  States  Steel,  Common,  fell  from  10  to  13  points  below 
the  minimum  quotations  of  July  30. 


CREDIT  IN  THE  UNITED  STATES       321 

prices.  By  the  end  of  September  means  had  been  devised 
for  restricted  dealings  in  listed  stocks  and  listed  and  un- 
listed bonds.  Finally,  the  intention  of  the  curb  to  open 
led  the  stock  exchange  to  arrange  for  dealmgs  in  unlisted 
stocks  through  a  mixed  committee.  In  November,  as  we 
have  seen,  the  high  pressure  for  loans  had  passed,  exports 
were  gaining,  and  some  recovery  was  at  hand.  On  No- 
vember 13  unrestricted  trading  in  listed  municipal  and 
state  bonds  for  domestic  account  was  established;  No- 
vember 16  the  curb  market  opened;  November  28,  in  a 
period  of  rising  prices,  dealings  were  allowed  on  the  floor 
of  the  stock  exchange  in  listed  bonds  for  cash  at  prices  not 
below  those  authorized  by  the  committee  from  time  to 
time.  The  generally  improved  situation  and  a  feeling  of 
confidence  brought  higher  prices,  and  this  re-  opening  of 
opening  step  was  a  success.  On  December  12  stock 
further  action  was  taken  by  authorizing  deal- 
ings in  a  designated  list  of  182  stocks  at  fixed  minimum 
prices,  which  were  two  or  three  points  below  the  quo- 
tations of  July  30.  A  rising  market  and  great  activity 
through  the  committee  in  stocks  not  on  the  designated 
list  finally  led  to  the  full  reopening  of  the  exchange  for 
all  securities  on  December  15, 1914,  after  a  period  of  sus- 
pension for  four  and  a  half  months.  It  was  not  until 
April  1,  1915,  however,  that  the  lists  of  minimum  prices 
were  finally  abolished.  Thus  the  market  for  securities  was 
finally  brought  to  life  again  by  the  fundamental  move- 
ment of  goods  which  underlies  all  credit  operations. 

After  the  opening  of  the  exchanges  very  large  amounts 
of  securities  were  absorbed  by  us.  As  regards  railway  se- 
curities alone  (which  in  past  years  formed  the  -j.^^^  ^^j^^ 
main  attraction  to  foreign  investors) ,  on  Janu-  of  returned 
ary  31,  1915,  $2,704,402,364  (par  value)  were  ^^'""^^'• 
held  abroad,  of  which  about  $1,518,590,878  (with  a  market 


322  CREDIT  OF  THE   NATIONS 

value  of  probably  $1,200,000,000)  had  been  returned 
to  this  country  by  January  31,  1917.^  This  figure,  of 
course,  does  not  include  sales  before  January  31,  1915, 
nor  those  since  January  31,  1917.  Then,  if  we  add  the 
return  of  securities  other  than  those  of  railways,  such  as 
industrials,  State  and  municipal  bonds,  it  is  fairly  within 
the  mark  to  estimate  the  total  volume  of  our  securities 
returned  to  us  in  the  first  three  years  of  war  at  not  less 
than  $2,200,000,000.2  The  remainder  of  foreign  holdings 
are  largely  impounded  in  the  hands  of  governments  as  a 
basis  for  loans  placed  in  our  markets.  While  there  now 
seems  to  be  no  more  fear  of  an  exceptional  avalanche 
of  selling  by  foreign  holders  of  our  securities,  there  have 
been  recently  sales  of  collateral  behind  British  loans  here. 
Having  arrived  at  the  approximate  amount  of  securi- 
ties entering  into  the  international  account,  and  also 
having  definite  figures  for  the  loans  made  to  Europe 
both  by  our  government  and  by  private  institutions  of 
credit,  we  are  now  in  a  position  to  take  up,  finally,  the 
story  of  the  foreign  exchanges  and  the  movement  of  gold. 
In  this  process  we  are  able  to  obtain  the  various  items 
which  offset  our  $6,800,000,000  of  surplus  exports  of  mer- 
chandise and  thus  balance  th.e  international  account  be- 
tween us  and  other  nations.  Credit  among  the  nations, 
as  well  as  credit  operations  within  each  nation,  are  writ- 
ten large  in  the  records  of  this  unexampled  war. 

§  6.  An  international  medium  of  credit  which  also 
saves  the  passage  of  gold  is  of  importance  in  so  far  as  it 
aids  in  an  inexpensive  and  effective  exchange  of  goods. 
In  our  domestic  trade  this  end  is  served  by  checks  drawn 
on   deposit  accounts,  that   is,  the  deposit-currency.     In 

'  Cf.  report  made  by  President  L.  F.  Loree  of  the  Delaware  and  Hudson 
Company,  based  on  information  furnished  by  144  railroads  over  100  miles  in 
length. 

*  t'j.  also  Third  Annual  Report  of  Federal  Reserve  Board,  p.  1. 


CREDIT  IN   THE   UNITED   STATES       323 

international  trade  this  service  is  rendered  by  bills  of 
exchange.  A  bill  of  exchange  is  an  order  on  a  foreign 
debtor  to  pay  a  certain  sum  (usually  the  pro-  ^.^^  ^^ 
ceeds  of  exports)  to  another  person  as  desig-  exchange 
nated  in  the  bill.  Thus  A,  having  sold  wheat, 
or  cotton,  to  B  in  London,  may  wish  the  cash  at  once,  and 
sells  his  claim  on  B  to  C,  in  New  York  or  elsewhere. 
Then  C,  owing  D,  in  London,  uses  the  bill  he  has  bought 
on  B  to  pay  D.  In  this  simple  way  two  shipments  of 
gold  are  obviated  by  bills.  Only  as  a  last  resort  is  gold 
actually  shipped  to  cover  a  difference  arising  from  offset- 
ting all  the  various  items  in  the  international- account.  At 
any  one  time  the  open  account  may  not  balance,  but  as 
an  excess  of  debts  may  be  followed  soon  by  an  excess  of 
credits,  the  account  is  kept  going  by  offsetting  claims 
through  bills  of  exchange  up  to  a  certain  point,  until  the 
price  of  bills  goes  up  or  down  enough  to  warrant  the 
expense  of  shipping  gold.  If  our  exports  are  large,  many 
bills  on  Europe  are  offered,  and  they  go  down  in  price; 
but  normally  they  would  not  be  sold  below 
the  rate  which  would  cover  the  cost  of  send-  points?^' 
ing  gold.  Between  us  and  London  par  for  a 
pound  sterling  is  $4.86^^,  and  the  shipping-point  about 
33^  cents  above  or  below,  which  includes  commissions, 
insurance,  and  interest  for  the  time  the  gold  is  on  the 
water.  The  shipping-point,  therefore,  may  vary,  espe- 
cially because  of  dangers  on  the  sea,  or  of  changes  in 
the  rates  of  interest.^  When  bills  rise  or  fall  because  of 
normal  fluctuations  in   the  movement  of  merchandise, 

'  The  par  in  New  York  for  foreign  moneys  is  as  follows: 

London. $4.8650 

Paris  (francs  equal  to  $1) 5. 1826 

Berlin  (cents  for  4  marks) 0 .  9525 

Russia  (for  1  rouble) 0 .  5146 

Italy  (lire  equal  to  $1) 5. 1826 

Holland  (florin) 0.4020 

Scandinavia  (crown),  Norway,  Sweden,  Denmark 0.2680 

Austria-Hungary  (crown) 0 . 


324  CREDIT  OF  THE  NATIONS 

securities,  etc.,  they  are  hemmed  in  above  and  below  by 
definite  shipping-points  for  gold.  If  gold  actually  moves, 
quotations  for  bills  cannot  go  beyond  these  points.  In 
other  words,  the  sending  of  gold  acts  as  does  redemption 
for  a  domestic  circulation;  it  prevents  depreciation.  If 
shipping-points  disappear,  bills,  like  inconvertible  cur- 
rency, may  go  to  any  figure  of  depreciation. 

It  was  long  ago  conceded  that  London  had  become  the 
recognized  credit  centre  of  the  world.  All  over  the  globe 
bills  drawn  on  London  were  an  accepted  means  of  pay- 
ment. There  was  enough  English  capital  en- 
centre  of  gaged  in  banking  to  aid*  in  moving  all  the  goods 
^°*^^**°°^  traded  in  through  London  from  every  foreign 
country.  If  one  of  our  banks,  for  instance,  had 
loaned  because  of  exports  of  breadstuffs  on  exchange  for 
ninety  days,  accompanied  by  bills  of  lading,  it  forwarded 
the  bill  of  exchange  drawn  by  the  shipper,  and  indorsed 
by  it,  to  London  for  acceptance  and  discount.  The  bank 
(or  the  exporter)  now  had  a  credit  in  its  favor  in  London. 
It  could  at  once  release  its  capital  by  drawing  a  demand 
bill  on  thi^  credit,  and  selling  it  in  this  country  to  an 
importer.  The  bank's  (or  the  exporter's)  capital  is  thus 
freed  for  additional  transactions  here,  while  the  task  of 
waiting  until  the  bill  matures  is  assumed  by  the  London 
bank.  In  that  way  we  obtained  the  aid  of  English  capi- 
tal on  short-term  bills  in  moving  our  crops  or  manufac- 
tured goods  to  foreign  markets.  Practically  every  other 
country  engaged  in  international  trade  had  the  same 
relations  with  London.  These  operations  were  carried 
through  by  the  use  of  bills  of  excliange.  The  foreign 
exchanges,  therefore,  are  interesting,  not  so  much  for  a 
knowledge  of  the  mechanism  itself  as  for  the  way  they 
disclose  the  workings  of  important  forces,^  whose  results 
are  registered  in  the  quotations  of  bills.     The  nature  of 

'  For  a  list  of  them,  see  p.  125. 


CREDIT  IN   THE   UNITED   STATES       325 

those  forces  in  this  country  we  have  just  been  studying; 
and  we  now  proceed  to  a  consideration  of  the  effects  of 
the  war  on  exchange. 

Owing  to  the  marked  falling  off  of  our  merchandise 
exports  in  the  spring  of  1914  (imports  actually  exceeding 
exports,  see  Chart  VII)  and  to  the  return  of  our  securities 
from  Europe,  there  was  the  final  resort  to  the 
shipment  of  gold  (see  Chart  VI),  amounting  situation 
to  $89,500,000  m  May,  June,  and  July;  for  j^f^i^°'° 
bills  were  in  demand  and  stood  at  the  upper 
shipping-point  of  about  $4.8820  in  New  York.^  By  the 
end  of  June  bills  began  to  decline,  because  of  our  borrow- 
ing in  Europe  in  anticipation  of  the  coming  heavy  exports 
of  the  autumn  due  to  the  large  crops  of  wheat  and  cot- 
ton. This  borrowing  was  carried  on  through  the  drawing 
by  bankers  of  time  bills  (or,  as  not  being  based  on  the  ex- 
ports of  goods,  "finance  bills")  on  European  lenders,  thus 
obtaining  credits  abroad.  The  buyers  of  these  bills  sold 
them  at  once,  believing  that  exchange  would  fall  in  the  au- 
tumn. That  is,  such  a  creation  of  foreign  credits  is  one 
of  the  offsets  in  the  international  account.  But,  irrespec- 
tive of  the  return  of  our  securities,  there  was  the  normal 
large  balance  already  due  by  us  to  Europe  for  imports 
of  goods,  expenditures  of  American  travellers  abroad,  and 
the  recent  placing  of  our  securities  there.  If  conditions 
had  remained  normal,  this  large  balance  against  us  would 
have  been  met  soon  by  bills  sold  on  the  coming  exports 
of  breadstuffs,  and  cotton,  in  the  autumn  months.  In 
fact,  dealers  in  exchange,  not  foreseeing  war,  no  doubt 
sold  bills  short  in  anticipation  of  the  great  crops.  Such 
was  the  situation  of  the  foreign  exchanges  at  the  out- 
break of  the  European  War. 

International  money  markets  are  exceedingly  sensitive 

'  In  his  article  on  the  crisis  of  1914,  already  referred  to.  Professor  Sprague 
has  given  an  extended  discussion  of  the  foreign  exchanges. 


326  CREDIT  OF  THE   NATIONS 

to  coming  danger,  and  after  the  violent  break  on  the 
Vienna  Bourse,  July  20,  European  discount  rates  ad- 
„     „  .         vanced,  foreign  exchange  in  New  York  rose  to 

New  York  i  t    i 

exchange  in  $4.8830;  and  on  July  23  exports  of  gold  were 
confusion.  resumed.  A  rise  in  exchange  meant  that  our 
European  creditors  were  trying  to  strengthen  their  posi- 
tion by  calling  for  gold.  The  continual  selling  of  our 
securities  here  began  to  tell  in  the  demand  for  bills  on 
Europe.  If  exports  of  our  goods  could  be  counted  on, 
the  storm  might  blow  over.  But  the  bottom  underneath 
international  credit  suddenly  dropped  out  when  the  war 
stopped  the  movement  not  only  of  goods  but  even  of  gold. 
There  has  probably  never  been  known  such  a  collapse  in 
the  foreign  exchanges  as  that  which  then  ensued.  It  was 
not  so  much  that  the  mechanism  failed,  but  that  the 
forces  whose  workings  are  registered  in  foreign  bills  were 
in  dire  and  unexpected  confusion. 

We  have  previously  related^  the  extraordinary  events 
which  brought  the  acceptance  and  discount  houses  of  Lon- 
don to  the  verge  of  ruin.  A  time-honored  reliance  was 
,     ,  suddenly  withdrawn  from  us.     Our  banks  had 

London  ,  . 

exchange  indorsed  bills  accepted  in  London,  and  if  the 
*^  ^°^'^'  acceptors  failed,  the  indorsers  would  be  liable. 

Even  if  the  acceptors  did  not  fail,  readjustment  must  take 
time.  Therefore,  when  London  could  not  render  account 
of  acceptances  based  on  shipments  of  goods  previously 
made,  American  capital  was  locked  up;  and  if  no  new 
bills  could  be  discounted  in  London,  it  meant  that  the 
exporting  country  must  itself  carry  the  loans  through  to 
maturity,  without  the  aid  of  foreign  credit.-  This  is  how 
the  shoe  pinched  us,  when  the  London  credit  system  was 

1  Supra.  Chapter  III,  §§  3,  4. 

2  Both  spot  (rates  on  bills  already  in  London)  and  forward  delivery  (rates 
on  bills  to  arrive  by  next  mail)  quotations  were  discontinued  on  Monday, 
July  27.     Cf.  Sprague,  loc.  cit.,  p.  506. 


CREDIT  IN  THE  UNITED  STATES       327 

disarranged.  The  buying  and  selling  of  exchange  became 
a  matter  of  uncertainty,  or  even  of  chaos.  From  July  27 
London  practically  ceased  discounting  foreign  bills.  As 
a  consequence  we  heard  much  of  the  loss  of  English  pre- 
eminence in  the  world  of  credit.  Of  course  no  market 
can  remain  the  centre  of  credit  which  is  unable  to  dis- 
count and  carry  to  maturity  time  bills  based  on  staple 
goods;  because  the  drawers  get  no  aid  if  they  cannot  real- 
ize on  bills  at  once.  It  does  not  follow,  however,  that 
English  capital  engaged  in  banking  has  been  so  far  de- 
stroyed by  the  failure  of  debtors  in  enemy  and  other 
countries  to  meet  their  obligations  to  London  that  it  will 
not  be  sufficient  in  the  future  to  resume  its  services  to 
foreign  drawers  of  bills.  The  cataclysm  may  be  only  a 
measure  of  the  intensity  of  the  temporary  shock,  and  not 
an  evidence  of  permanent  decline.  Likewise,  j^g^york 
New  York  cannot  assume  London's  place  sim-  and  London's 
ply  because  it  is  outside  the  region  of  actual  ^"P^'^^^'^y- 
destruction  by  war.  Any  other  city  can  take  away  Lon- 
don's pre-eminence  only  if  it  can  surpass  London  in  the 
capital  at  its  disposal  for  accepting  and  discounting  bills 
from  all  parts  of  the  world.  As  yet  we  have  not  seem- 
ingly the  surplus  capital,  the  experience,  the  information 
concerning  local  conditions  and  standing  of  merchants  in 
foreign  countries,  nor  the  machinery,  to  meet  the  emer- 
gency. Much,  however,  is  being  done  to  improve  our 
position. 

The  storm  broke  in  our  foreign-exchange  market  on 
July  27,  1914.  Time  bills  based  on  shipment  of  goods 
could  not  be  turned  into  cash  here  by  the  sale       _.  ^    . 

I  High  pnce 

of  demand  bills  on  London.     If  our  bankers       for  sterling 
had  balances  abroad  bills  could,  of  course,  be       *^*^  ^^^' 
drawn  on  them;  but,  as  before  explained,  we  were  in  the 
normal  state  of  indebtedness,  looking  forward  to  exports 


328  CREDIT  OF  THE   NATIONS 

to  give  us  sufficient  means  of  payment.  To^  save  their 
standing  those  in  urgent  need  of  making  payments  in  Eu- 
rope bid  high  for  exchange.  Demand  exchange  was  quoted 
at  $4.92,  far  above  the  customary  shipping-point.  Such 
high  rates  offered  a  premium  on  exports  of  gold.  On 
July  27  and  28,  $19,000,000  were  sent  out,  and  by  August  1 
an  additional  $17,000,000  was  engaged  for  export.  These 
sums  aided  the  market  for  exchange  but  slightly,  since 
the  heavy  sales  of  our  securities  (as  described  in  the  pre- 
ceding section)  during  this  same  week  had  created  a  new 
and  abnormal  demand  for  foreign  exchange.  Exchange 
rose  to  $6.50,  and  even  in  some  instances  to  $7.00  for  £l. 

Then  intervened  an  extraordinary  situation.  We  were 
on  the  gold  basis.  If  we  owed  others  and  had  the  gold, 
why  was  exchange  selling  at  a  price  regardless  of  the  ship- 
ping-point .^^  It  was  clear  that  all  the  offsets 
of  gold  for  an  adverse  balance  of  trade  had  been  ex- 

impossibie.  haustcd,  cxccpt  the  shipment  of  gold.  Un- 
like France  and  Germany,  the  United  States  had  no 
reason  for  abandoning  gold  payments.  Suddenly  it  was 
realized,  on  the  declaration  of  war,  that  it  was  physically 
impossible  to  move  gold  by  sea.  The  incident  of  the 
Kronprinzessin  Cecilie,  which,  carrying  gold  for  London, 
was  obliged  on  August  4  to  turn  back,  actually  caused 
our  banks,  although  with  the  needed  gold  embarked,  to 
default  on  their  payments  due  in  London.  It  was  as  if 
a  man  with  the  money  in  his  hands  to  prevent  the  fore- 
closing of  a  mortgage,  was  forcibly  restrained  from  reach- 
ing the  door  of  his  creditor.  It  was  a  precarious  position. 
Seemingly  we  could  not  pay  our  debts. 

Other  consequences  followed.  The  impossibility  of 
sending  gold  through  usual  channels  to  Europe,  because 
neither  ships  nor  insurance  could  be  had,  played  havoc 
with  the  funds  of  Americans  happening  to  be  travelling 


CREDIT  IN  THE   UNITED   STATES       329 

abroad  when  the  war  came  on.  Bills  drawn  on  letters  of 
credit  from  American  banks  early  in  August  were  not 
cashable  except  at  a  great  discount.  For  great 
numbers  of  travellers  the  only  relief  came  from  ©f  li'^SiS 
an  appropriation  by  Congress  of  $2,750,000  ^aveUersin 
in  gold  to  be  sent  by  our  government  in  the 
war-ship  Tennessee  to  the  various  embassies  in  Europe. 
For  a  time,  therefore,  the  effect  was  the  same  as  if  we 
had  suspended  specie  payments. 

For  about  two  weeks,  until  England's  fleet  had  pro- 
vided a  fairly  safe  passage  across  the  Atlantic,  neither 
goods  nor  gold  could  be  transmitted.  Hence,  exchange 
could  not  be  drawn  when  the  very  basis  for  it 
had  ceased  to  exist.  The  first  step,  however,  BaS*^of° 
was  taken  in  removing  the  obstacles  to  the  England  at 
shipment  of  gold  when  the  Bank  of  England 
established  branches  in  Canada  (Ottawa),  South  Africa, 
and  Australia,  in  which  deposits  of  gold  counted  as  re- 
serves of  the  Bank  and  thus  could  cover  English  credits. 
Since  our  main  intercourse  in  trade  and  credit,  after  the 
beginning  of  the  war,  was  with  London  and  Paris,  the 
possibihty  of  sending  gold  by  land  to  the  branch  Bank  of 
England  at  Ottawa,  on  August  12,  removed  all  risks  in 
its  shipment  by  sea.  Means  for  restoring  the  normal 
machinery  of  foreign  exchange  had  thus  begun.  Selling 
of  securities  had  been  stopped.  Really  essential  recovery 
could  come  only  with  the  exports  of  goods  in  substantial 
amounts;  and  yet  we  have  seen  (Chart  VII)  that  imports 
exceeded  exports  until  October.  Consequently,  restora- 
tion of  fairly  normal  conditions  in  the  exchange  market 
could  not  be  expected  earlier  than  that  month. 

Meanwhile,  pressure  was  put  upon  us  to  meet  our 
foreign  obligations  in  gold.  The  city  of  New  York  had 
used  its  tax  warrants  to  obtain  funds  in  anticipation  of 


330  CREDIT  OF  THE  NATIONS 

collections  as  a  basis  for  loans  in  London  and  Paris,  to- 
talling $80,243,940.47,  because  it  could  borrow  there  at 

lower  rates  than  here.     These  loans  began  to 
NevTvork        ^^^^  ^^®  ^^  September,  the  last  instalment  ma-l 
City  loan         turiug  in  December,  1914.     To  maintain  the* 

credit  of  the  city  the  New  York  banks  agreed  to 
become  responsible  for  their  payment  in  gold  or  sterling 
exchange  as  these  loans  matured.  This  agreement  was 
regarded  in  the  exchange  market  as  a  reason  for  a  strong 
demand  and  high  prices  for  exchange.  Meanwhile  the 
rate  had  dropped  to  about  $5,  while  the  shipping-point 
to  Ottawa  was  $4.91.  There  was  thus  still  a  considerable 
profit  in  sending  gold. 

The  actual  outcome  of  these  exchange  opei'atlons  is 
instructive.  To  meet  this  foreign  debt  the  subscribing 
New  York  banks  actually  sent  in  the  following  means  of 
payment : 

Gold $35,264,637.55 

Foreign  exchange 10,121,563.00 

Checks  on  New  York  banks 34,857,739 .  92 

$80,243,940.47 

That  is,  by  reason  of  credit  operations,  even  in  this  time 
of  intense  demand  for  gold,  only  44  per  cent  of  the  foreign 
debt  was  actually  paid  in  gold  by  shipment  to  Ottawa. 
The  foreign  exchange  turned  in  was  purchased  on  Lon- 
don by  those  banks  who  preferred  to  buy  exchange  at  a 
premium  rather  than  give  up  gold  from  their  own  vaults. 
The  remainder,  consisting  of  New  York  funds,  was  skil- 
fully used  in  buying  exchange.  As  November  drew  on 
it  will  be  remembered  that  exports  of  goods  began  to 
mount  up,  mainly  on  account  of  Ikiropean  purchases 
here  of  war  supplies.  Thus  bills  came  forward  in  large 
amounts,  and  when,  on  November  12,  the  managers  an- 


CREDIT  IN  THE  UNITED  STATES       331 

nounced  that  they  already  had  exchange  in  hand  to  cover 
their  needs,  the  prices  fell  below  the  point  of  export,  and 
even  touched  $4.86^,  the  lowest  quotation  since  the  out- 
break of  war.  Those  who  had  been  holding  exchange  for 
a  high  price  suffered.^  The  foreign  creditors  were  also 
offered  by  the  city  short-term  bills  bearing  6  per  cent  in 
lieu  of  repayment,  but  the  approximate  amount  of  the 
new  notes  taken  in  London  and  Paris  was  only  $2,000,000. 
This  successful  outcome  was  due  not  only  to  the  in- 
crease of  exports,  but  also  to  the  operations  of  the  Gold 
Pool,  which  was  trying  to  provide  gold  for  those  in  all 
parts  of  the  country  who  had  to  meet  obliga- 
tions in  Europe  maturing  before  January  1,  pooi^°^^ 
1915.  Concerted  action  in  collecting  gold 
would  obviously  work  to  lower  the  rates  for  exchange. 
In  the  fixing  of  all  prices  there  is  a  psychological  element; 
and  if  it  were  known  that  gold  was  available,  little  would 
be  called  for.  Holders  of  exchange  would  take  less. 
The  pools  for  providing  gold  thus  served  the  necessary 
function  of  steadying  exchange  during  a  time  of  extreme 
confusion  until  exports  of  goods  could  again  move.  Pay- 
ment for  our  imports  and  for  the  securities  returned  be- 
fore the  stock  exchange  closed  was  urgent.  In  all  about 
$450,000,000  would  be  needed  by  January  1,  1915.  A 
conference  was  called  August  14  in  Washington,  at  which 
measures  were  proposed  to  liberalize  our  shipping  laws 
and  create  a  bureau  of  war  insurance  to  stimulate  the 
transportation  of  exports.  This  was  followed  by  a  con- 
ference of  bankers,  on  September  4,  1914,  under  the  aus- 

'  While  the  banks  were  responsible  for  providing  gold  to  the  whole  amount 
of  the  loan,  they  agreed  to  furnish  sterling  exchange  at  $5,035,  and  Paris  bills 
at  $1  for  each  five  francs,  the  rates  prevailing  at  the  time  of  the  contract;  but 
they  also  agreed,  if  exchange  could  be  bought  at  lower  rates,  to  pay  the  city 
all  profits  over  2  per  cent.  It  was  reported  that  the  city  received,  under  this 
arrangement,  about  $450,000. 


332  CREDIT  OF  THE  NATIONS 

pices  of  the  Federal  Reserve  Board,  which  proposed  the 
formation  of  a  gold  fund,  finally  fixed  at  $100,000,000,  to 
be  subscribed  by  banks  in  all  reserve  and  central  reserve 
cities,  of  which  25  per  cent  was  in  fact  called  for  pay- 
ment on  October  13,  1914.  On  September  30,  however, 
in  anticipation  of  getting  the  pool  into  operation  nine 
leading  New  York  banks  advanced  $10,004,221.76  in  gold, 
which  was  immediately  sent  to  Ottawa  under  an  arrange- 
ment with  the  Bank  of  England  for  a  corresponding  credit 
in  London.  The  Gold  Pool  could  now  supply  demands 
for  exchange,  which  were  granted  at  rates  fixed  by  the 
committee^  in  charge.  Payments  for  exchange  must  be 
made  in  certified  checks  on  New  York  banks.  Subscrip- 
tions to  the  fund  amounting  to  $108,929,360  came  from 
all  parts  of  the  country,  but  New  York  City 
aiTstnt.  supplied  $45,000,000.  In  its  practical  work- 
ings it  is  again  worth  noting  that  the  actual 
shipments  of  gold  were  small,  no  gold,  in  fact,  having 
been  sent  to  Ottawa  beyond  the  sum  advanced  before  the 
pool  got  into  operation.  Individual  banks,  however,  for 
their  own  account  shipped  abroad  additional  gold,  amount- 
ing to  at  least  $66,000,000  by  December,  1914.  The  total 
amount  of  drafts  and  cables  called  for  and  finally  completed 
by  the  pool  was  $10,056,307,  and  in  October,  it  will  be  re- 
called, exchange  began  to  decline.     In  the  early  opera- 

'  The  actual  management  was  intrusted  to  a  committee  of  five  bankers  in 
New  York  City  where  the  market  for  exchange  centres.  This  New  York  com- 
mittee had  authority  "to  call  upon  the  contributors  for  gold  or  gold  certificates 
from  time  to  time  in  instalments  as  required  (provided  that  the  contributors 
shall  not  be  called  upon  to  pay  any  portion  of  an  instalment  which  may  make 
their  investment  in  the  fund  at  any  one  time  exceed  25  per  cent  of  their  original 
contribution),  to  arrange  for  shipments  of  gold  to  other  countries,  to  sell  ex- 
change and  cable  transfers  against  such  shipments  at  such  prices  as  they  may 
fix,  to  determine  to  whom  and  under  what  conditions  foreign  exchange  may 
be  sold,  to  distribute  the  proceeds  of  such  sales  among  the  contributing  banks 
in  New  York  funds,  and  to  fix  a  date  for  the  termination  and  final  settlement 
of  the  fund." 


CREDIT  IN  THE  UNITED  STATES       333 

tions  of  the  pool  bills  were  high  and  the  profits  on  the  ex- 
change sold  were  large.  As  fast  as  exchange  was  sold,  re- 
payments were  made  to  subscribers  in  current  funds,  who 
had  thus  in  effect  swapped  some  of  their  gold  for  New  York 
funds.  On  the  call  for  the  first  25  per  cent,  $27,232,340 
was  paid  in;  but  by  October  28, 10  per  cent  was  returned 
to  subscribers.  A  second  repayment  of  10  per  cent  was 
made  November  17,  and  a  third  on  December  7.  Thus  a 
comparatively  small  shipment  of  gold  served  to  meet  a 
seemingly  portentous  demand  for  foreign  exchange.^  It 
will  be  remembered,  however,  that,  although  our  banks 
sent  to  Ottawa  over  $75,000,000  in  gold,  the  inauguration 
of  the  Federal  Reserve  system  on  November  16,  1914, 
lowered  the  legal  reserves  by  some  $300,000,000.  Hence 
the  shipment  of  gold  at  this  time  was  not  regarded  as 
serious  in  its  effect  on  reserves. 

The  chronology  of  the  New  York  City  pool,  the  Gold 
Pool,  the  decline  of  high  quotations  of  exchange,  the  ces- 
sation of  the  pressure  for  loans,  jumps  with  the  time  when 
goods  began  to  move  to  Europe.     In  the  long 
run  it  is  goods  that  must  pay  for  our  imports      ^!?*v^  ^°I 
and  all  foreign  demands.     All  the  items  in  the     when  goods 
international  account  work  for  an  equilibrium;      ^p'^rted. 
but  gold  itself,  as  has  been  frequently  said,  is 
sent  last  and  only  as  a  means  of  paying  balances.^     Bills 
of  exchange  act  as  a  device  for  preventing  the  shipment 
of  gold  until  the  last  necessity.     Only  as  much  gold  is 

*  The  total  expenses  of  the  Gold  Pool  were  $10,542.67,  and  all  balances  due 
subscribers  were  repaid  in  February,  1915. 

^  A  fact  so  obvious  as  this  disp>oses  of  the  archaic  theory  that  it  is  the  ship- 
ment of  gold  which  works  as  a  causal  first  force,  bringing  about  high  prices  (by 
virtue  of  the  quantity  theory),  and  thus  stimulating  imports  into  the  country 
to  which  the  gold  is  sent.  The  true  order  of  events  is  just  the  reverse:  goods  or 
securities  move  first,  for  reasons  independent  of  the  circulation,  bills  of  exchange 
keep  the  account  open,  and  gold  is  sent  only  as  a  last  resort.  In  such  opera- 
tions changes  of  price,  if  any,  have  preceded  the  shipment  of  gold. 


334  CREDIT  OF  THE  NATIONS 

needed  as  will  serve  to  test  the  solvency  of  credit  opera- 
tions, and  to  redeem  international  obligations  in  the  only 
money  accepted  as  an  acquittal  of  debt  between  nations. 
Just  as,  when  domestic  paper  money  is  convertible  on  de- 
mand, no  one  has  an  object  in  presenting  it  for  gold,  so 
in  international  dealings,  when  it  is  known  that  gold  can 
be  had,  it  is  not  wanted.  In  brief,  the  gold  reserves  on 
which  for  the  moment  our  credits  rested  were  protected 
from  the  unprecedented  foreign  demand,  and  yet  our 
pressing  debts  in  Europe  were  successfully  paid  off.  The 
storm  had  abated. 

The  collection  of  gold  funds  to  send  abroad  was  accom- 
plished in  the  teeth  of  a  tendency  of  our  banks  to  hoard 
gold  in  a  time  of  emergency.     Contrary  to  well-established 

European  practice,  the  soundness  of  a  bank 
S^spke^of"^^  had  come  to  be  measured  in  this  country 
tendency  to      rather  by  the  amount  of  its  cash  reserves  than 

by  the  quality  of  its  loans.  The  whole  func- 
tion of  reserves  to  supply  cash  when  called  for  in  a  crisis 
was  seemingly  disregarded.  Our  highly  individualistic 
banking  system  had  been  disunited  and  without  the  pos- 
sibility of  concerted  action.  Each  for  himself  was  the 
rule  when  a  drain  on  gold  came.  For  some  to  give  up 
gold  when  others  were  hoarding  it  plaj^ed  into  the  hands 
of  the  selfish  and  the  foolish  banks.  The  purpose  behind 
the  passage  of  the  Federal  Reserve  Act  was  to  remove 
the  emphasis  on  cash  reserves  and  transfer  it  to  short- 
time  paper  suitable  for  rediscount,  the  proceeds  of  which 
would  at  once  increase  reserves.  In  fact,  there  was 
no  scarcity  of  gold.  In  October  the  gold  holdings  of 
the  Treasury  in  round  numbers  were  $1,000,000,000, 
and  of  the  banks  and  trust  companies,  $600,000,000, 
sufficient  for  all  needs  if  properly  managed.  Since  the 
Federal  Reserve  Banks  were  not  yet  in  operation  at 
this  time,  the  voluntary  organization  of  pools  was  needed 


I 


CREDIT  IN  THE  UNITED  STATES       335 

to  secure  trusted  leadership  and  unity  of  action.  Thus 
the  joint  effort  to  meet  our  international  obligations  in 
gold  protected  the  credit  of  our  entire  banking  system 
and  worked  an  advantage  for  all  members  of  it.  Only  by 
courage  and  resolution  in  times  of  stress  can  a  repu- 
tation for  stability  and  good  faith  be  built  up  among 
nations. 

Out  of  the  time  of  a  startling  upheaval  of  trade  and 
credit  came  a  period  of  comparative  calm  with  opportu- 
nity for  a  readjustment  to  new  conditions.  Then  later 
followed  a  dramatic  reversal  of  all  that  had 
been  so  alarming  in  regard  to  gold,  trade,  and  tide°in  * 
credit.  Of  the  many  remarkable  events  in  the  October, 
most  remarkable  of  all  wars,  nothing  was  so 
unexpected  or  so  epoch-making  as  the  turn  in  the  tide  of 
our  exports  (see  Chart  VII),  and  the  consequent  revolu- 
tion in  the  prices  of  exchange.  The  tide  began  to  creep 
in  by  October,  1914,  when  first  the  exports,  especially  of 
foodstuffs,  cotton,  and  munitions,  began  to  exceed  our 
imports.  By  November  and  December  the  rising  flood 
had  floated  many  an  enterprise  off  the  rocks.  Foreign 
markets  tugged  at  the  tow-ropes  of  our  exportable  prod- 
ucts. As  an  expression  of  the  new  situation,  bills  began 
to  fall  to  a  point  which  warranted  the  importation  of  gold. 

The  key  to  the  whole  situation,  let  it  be  repeated,  lay 
in  the  unexpected  and  unprecedented  increase  of  our  ex- 
ports.   (See  Chart  VII.)    In  comparison,  every  other  item 
in  the  international  account  is  insignificant. 
It  is  this  prodigious  excess  of  exports  of  goods     f^^^ 
which  has  created  latterly  the  extraordinary     international 
problems  m  credit,  exchange,  and  gold  which 
exact  a  wise  solution.     By  way  of  recapitulation  we  may 
again  state  the  items  by  which  the  international  account 
must  be  balanced  sooner  or  later.^ 

1  Cf.  p.  125. 


336 


CREDIT  OF  THE  NATIONS 


Cr. 


Exports  of  goods. 

Remittances  to  friends  in  Europe. 

Funds  of  returning  emigrants. 


Dr. 


Imports  of  goods. 

Expenditure  of  American  travellers  in 

Europe. 
Freight  and  insurance  on  imports. 
Returns  due   to  foreigners   on  their 

holdings  of  our  securities. 


These  are  the  normal  items  in  a  static  condition  of 
trade.  The  dynamic  forces  enter  in  disturbances  of  ex- 
ports and  imports,  the  return  of  securities,  the  cessation 
of  travel  and  remittances,  thus  necessitating  a  rebalanc- 
ing of  the  account  by  obtaining  new  credits  in  other 
countries  having  a  favorable  excess  of  exports,  and  even 
by  a  large  movement  of  gold  when  it  cannot  be  prevented 
by  a  change  in  the  other  items.  It  is  the  dynamic  boiling 
in  the  international  pot  which  has  created  the  problems 
in  exchange  and  gold. 

In  the  first  three  years  of  the  war  the  upheaval  caused 
by  the  excess  of  exports^  had  created  a  credit  abroad  in 
favor  of  the  United  States  of  $6,864,700,000.  How  were 
we  paid  ?  Certainly  not  all  in  gold.  The  settlement  was 
in  fact  carried  through  by  credit  operations,  together  with 
shipments  of  gold  amounting  to  about  only  16  per  cent  of 
the  whole  balance  in  our  favor. 

As  to  the  changes  in  the  other  items,  the  remittances 
to  friends  in  Europe  had  fallen  off  by  1915.  They  have 
been  estimated  in  the  past  at  $250,000,000  a  year,  the 
foreign  postal  orders  alone  running  about 
customary  $100,000,000.  But  the  sums  sent  for  aid  to 
Items.  Belgium  and  other  countries  have  much  more 

than  offset  any  decline.  The  funds  carried  away  by  re- 
turning emigrants  since  the  war  must  be  very  small.  The 
expenditure  of  American  travellers  in  Europe,  which  has 

»  Cf.  aupra,  p.  319. 


CREDIT  IN  THE  UNITED  STATES       337 

been  estimated  at  from  $50,000,000  to  $200,000,000  a  year, 
has  ceased.  For  freight  and  insurance  on  the  ocean  we 
are  paying  not  less  than  $25,000,000  a  year.  On  the 
assumption  that  foreigners  held  about  $6,000,000,000  of 
our  investments,  and  that  over  $2,000,000,000  have  been 
returned  to  us,  we  still  owe  on  the  dividend  item  probably 
$200,000,000  per  annum. 

The  story  of  the  means  by  which  this  prodigious  credit 
in  our  favor  was  settled  has  exceptional  interest  and  fur- 
nishes many  lessons  for  the  future.  Since  no  one  could 
see  far  ahead  in  a  time  of  war,  it  is  not  strange    „  .  ,   , 

11  PI-  T  Period  of 

that  the  pangs  oi  readjustment  were  discon-  readjustment 
certing.  But  by  November,  1914,  even  before  "*  ^^^^* 
the  Federal  Reserve  Banks  opened  (November  16),  the 
period  of  recovery  had  set  in,  exports  were  going  out,  ex- 
change was  falling,  the  stock  exchange  had  partially  re- 
opened. By  December  exports  of  gold  had  practically 
ceased.  With  the  beginning  of  1915  until  the  following 
autumn  there  ensued  the  period  of  adjustment  to  the  new 
war  conditions.  By  November,  1915,  heavy  gains  in  our 
trade  were  generally  acknowledged.  During  this  period 
are  found  the  most  interesting  developments  affecting 
gold  and  the  international  account. 

By  February,  1915,  exports  rose  to  a  new  height,  and 
by  September  of  the  same  year  they  had  started  on  a  mo- 
mentous climb  never  before  dreamed  of.     (See  Chart  VII.) 
Of  course  exchange  on  London  and  Paris  went 
to  new  low  points;  imports  of  gold  began  in  Y^^/^®?®" 
February  and  continued  to  a  record-breaking  excess  of 
ascent  in  October.     (See  Chart  VI.)     The  ship-  fow°exchange. 
ment  of  gold,  large  as  it  was,  had  little  effect  on 
the  prices  of  exchange.     Bills  were  in  far  too  great  a  sup- 
ply.    Then  was  made  clear  the  real  issue.     It  was  obvious 
that  the  balance  in  our  favor  could  not  possibly  be  met  by 


338  CREDIT  OF  THE  NATIONS 

gold.  Moreover,  England  and  France  could  not  spare 
so  much  gold,  and  we  did  not  need  it.  The  war,  with  the 
vast  purchases  in  the  United  States,  had  produced  a  situ- 
ation quite  out  of  the  ordinary,  one  which  could  be  met 
only  by  extraordinary  devices. 

It  is  to  be  noted  that,  normally,  the  rate  of  interest  in 
New  York  would  have  affected  the  movement  of  gold  to 
this  country.^  If  our  interest  rates  were  low,  capital  would 
not  have  moved  here.  To  January,  1915,  the 
ratrof°  °^  rates  on  call-loans  in  New  York  fell  to  2  3^  per 
interest  on       cent,   just   whcn   foreign   exchange   indicated 

6XCtlfl.Il£f6  

coming  imports  of  gold.  The  low  price  of  ex- 
change, however,  was  not  a  bid  for  capital.  It  was  not  a 
normal  situation.  In  fact,  it  was  necessary  to  get  muni- 
tions from  us  at  any  cost,  even  that  increased  by  the  fall 
in  exchange.  Prices  of  exports  thus  rose  before  gold  came. 
Exports  had  to  go,  and  the  means  of  payment  was  left  to 
be  worked  out  somehow  in  the  future. 

Everything,  therefore,  pointed  to  the  necessity  of  find- 
ing some  other  offsets  to  our  credits  than  the  usual  resort, 
in  ordinary  emergencies,  of  sending  gold  to  us.  As  early 
as  April,  1915,  the  relation  between  the  low  rate  of  ex- 
change and  credits  to  foreigners  became  plain.  The  low 
exchange  rate  merely  registered  the  extent  of  foreign 
purchases  here;  hence  the  problem  was  one  of  granting 
credits.  A  first  and  obvious  offset  was  the  return  of  our 
securities  held  in  Europe,  of  which  we  have  previously 
spoken  (§5).  Beginning  with  January,  1915,  the  sales 
have  continued  into  1917,  and  afforded  an  offset  against 
our  credits,  as  already  estimated,  of  about  $2,200,000,000. 

The  possibility  of  obtaining  loans  in  this  country  to  be 
expended  for  purchases  here  was  raised  early  in  the  war  by 

*  Cf.  Laughlin,  Principles  of  Money,  cbap.  X,  "  Prices  and  the  International 
Movement  of  Specie,"  §  8. 


CREDIT  IN  THE  UNITED   STATES       339 

France  and  Russia.     Through  its  banking  agents  England 
had  been  financing  purchases  for  herself  and  others  on  a 
large  scale  in  the  United  States.     Very  consid- 
erable amounts  were  thus  borrowed  here  from     ^^l^dits  in 

this  country. 

private  credit  institutions  and  banks.  This 
process  worked  out  quite  slowly.  American  investors  had 
not  been  familiar  with  the  securities  of  many  foreign  coun- 
tries freely  dealt  in  on  European  markets.  There  was 
hesitation  in  taking  the  direct  obligations  of  important 
belligerent  governments  on  the  ground  that  the  enormous 
war  expenditures  would  soon  result  in  financial  exhaustion. 
In  August  of  1915  serious  attempts  were  made  to  sup- 
port English  exchange  by  sending  here  some  $50,000,000 
of  gold  and  as  much  more  of  our  securities.  In  spite 
of  this  and  other  shipments  of  gold,  exchange  continued 
to  fall.  They  were  only  palliatives.  Sterling  exchange 
dropped  to  4.55  J^.  So  serious  and  expensive  was  this 
rate  for  English  buyers  that  new  efforts  had  to  be  made 
to  remedy  the  situation.  The  rapidly  increasing  exports 
could  not  be  overtaken,  even  by  the  exceptional  imports 
of  gold  up  to  October.  Very  early  in  September  bills  on 
London  actually  touched  the  incredibly  low  point  of 
$4.49,  showing  a  depreciation  of  over  7  per 
cent.  So  critical  was  the  case  that  an  English  j^^|°"^"°''^ 
and  French  commission  arrived  here  to  nego- 
tiate a  government  loan.^  The  Anglo-French  five-year 
5  per  cent  external  loan  for  $500,000,000  was  negotiated 
with  some  diflSculty,  our  bankers  asking  for  a  collateral 
loan,  while  this  was  a  direct  obligation  of  the  English 

*  Not  much  importance  need  be  given  to  the  plea  that  Americans  must  grant 
credit  to  English  purchasers  of  munitions,  or  they  would  buy  elsewhere.  Apart 
from  Canada,  there  was  no  other  source  of  such  supplies.  War  demands  were 
imperative  and  exports  went  on  at  any  obtainable  price.  The  high  prices 
of  munitions  had  nothing  to  do  with  the  quantity  of  money  in  circulation,  nor 
was  credit  easy  to  get. 


340  CREDIT  OF  THE  NATIONS 

Government.  In  response  to  this  loan,  exchange  rose  to 
$4.72,  but  soon  dropped  again  to  $4.62,  For  a  time  early 
in  1916  gold  was  not  largely  imported.  In  that  year  there 
began  to  be  placed  here  a  series  of  loans  by  English,  French 
(both  government  and  municipalities),  Russian,  Italian, 
Canadian,  and  other  governments.  Apart  from  many 
private  loans,  these  offerings  in  our  markets  were  taken 
by  January,  1917  (excluding  Canadian  borrowings),  to  the 
sum  of  $1,570,000,000. 

The  case,  however,  needed  even  more  drastic  treat- 
ment. When  this  country  entered  the  struggle  (April  6, 
1917)  loans  were  soon  made  directly  by  the  American 
Government  to  the  Allies  to  cover  the  still  in- 
United  creasing  volume  of  purchases  here.     To  Sep- 

^^*^'-  tember  25,  1917,  under  the  Act  of  April  24, 

1917,  these  loans  actually  made  amounted  to  $2,149,000,- 
000,  while  credits  had  been  agreed  upon^  for  $2,426,- 
400,000. 

We  are  now  able  to  see  how,  in  actual  practice,  the  in- 
ternational account  which  for  the  first  three  years  of  the 
war^  showed  a  credit  in  our  favor  of  $6,864,700,000  was 
balanced,  and  how  much  gold  was  imported 
Totaiimports    ^  ^.j^jg  settlement.     From  August  1,  1914,  to 

of  gold.  „    . 

August  17,  1917,  the  excess  oi  nnports  over 
exports  of  gold  was  $1,111,958,000,^  or  more  than  the 
whole  stock  in  the  Treasury  before  the  war. 

The  total  result  for  the  three  years  may  be  expressed 


1  Great  Britain $1,190,000,000 

France 650,000,000 

Italy 255,000,000 

Russia 275,000,000 

Belgium 53,400,000 

Serbia 3.000,000 

«  See  pp.  319,  336. 

3  Federal  Reserve  Bulletin,  September,  1917,  p.  655. 


CREDIT  IN   THE   UNITED   STATES       341 

approximately  in  the  final  international  balance-sheet  for 
three  years  (in  millions) : 


Cr. 

Dr. 

Merchandise  balance $6,865 

Remittances'    to    friends  (3 

years) 750 

Relief  'unds 90 

Securities  returned $2,200 

Loans     by     non-government 

institutions 1,570 

Loans  by  the  United  States .  .    2,149 
Dividend  account  (3  years) .  .       600 
Freights    and    insurance     (3 

years) 75 

Imports  of  gold 1,111 

<.       :■ 

$7,705 

$7,705 

Thus,  by  Great  Britain  requisitioning  American  and 
other  securities  held  by  English  investors,  to  be  used  in 
steadying  the  rate  of  exchange  on  New  York  in  the  sum- 
mer of  1915,  by  loans  in  our  markets,  and  by 

r,       ,  111-  •  1  sterling 

nnal  resort  to  gold  shipments,  it  came  about  exchange 
by  the  middle  of  1916  that  sterling  exchange  stabilized, 
was  pegged  at  the  level  of  $4.75-$4.76.2  The  high  rates 
of  insurance  made  a  lower  shipping-point  than  in  normal 
times,  so  that  this  rate  does  not  register  a  depreciation  in 
English  funds  by  the  whole  difference  below  $4.8665. 
English  exchange  has  been  stabilized  within  about  2  per 
cent  of  the  old  par.  This  is  the  outcome  of  a  difficult 
problem.  The  working  of  credit  among  the  nations  thus 
makes  an  impressive  showing  through  the  unprecedented 
operations  of  foreign  exchange. 

The  case  of  London  exchange  has  been  given  first  place, 
owing  to  the  dominant  position  of  our  trade  with  Great 
Britain.   Moreover,  French  had  been  subordinated  to  Eng- 

^  Probably  the  remittances  fell  away  from  the  above  estimate;  and  the  relief 
funds  were  doubtless  much  larger  than  given  above.  These  are  the  only  items 
in  the  account  not  based  on  definite  authority. 

-  C/.  swpra,  p.  130. 


342 


CREDIT  OF  THE  NATIONS 


lish  exchange  by  sending  French  gold  through  London.  An- 
other phase  of  the  exchange,  however,  which  furnishes  valu- 
able experience  is  that  with  neutral  countries, 
f  ^ute^^^  °°  The  dealings  with  European  neutrals  have  given 
rise  to  difficulties  of  exchange  as  well  as  of  inter- 
national law.  They  illustrate  especially  the  possibilities 
of  extreme  fluctuations  in  rates,  when  shipping-points 
practically  disappear  because  of  an  inability  to  remit  gold. 
It  makes  no  difference  whether  the  failure  to  send  gold  is 
intentional  or  unintentional;  the  effect  is  the  same.  In 
spite  of  the  colossal  balance  of  trade  in  our  favor,  in  spite 
of  our  large  stock  of  gold.  New  York  exchange  has  been 
at  a  serious  discount  in  Spain,  Switzerland,  Holland,  Den- 
mark, and  Sweden  (as  may  be  seen  in  Chart  IX).  So 
many  cross-currents  are  at  work  that  no  one  cause  for 
the  depreciation  suffices.  In  the  fiscal  year  of  1915  our 
exports  to  Sweden  were  more  than  six  times  the  normal 
shipments;  and  those  to  Holland  were  at  the  highest  that 
same  year.  Not  until  1917  did  our  imports  from  Sweden 
show  a  marked  increase;  while  those  from  Holland  re- 
mained at  normal. 

The  facts  are  now  well  known  that  the  sudden  increase 
in  the  exports  of  cotton,  copper,  and  other  needed  articles 
from  this  country  to  European  neutrals  indicated  pur- 
chases by  neutral  merchants  for  German  ac- 

High  rates       couut.     For  a  Considerable  period,  indeed,  set- 
early  in  1915.  ^ 

tlements  between  Germany  and  the  United 
States  went  on  through  Amsterdam.  The  consequent 
excess  of  our  exports  over  receipts  from  these  neutrals, 
and  the  demand  for  New  York  funds,  explains  the  pre- 
mium in  Europe  on  New  York  exchange  in  the  early  part 
of  the  war  (when  the  lines  in  Chart  IX  were  above  100). 
At  the  end  of  1915  for  Holland  and  Scandinavia,  and  in 
the  spring  of  1916  for  Spain  and  Switzerland,  exchange 


CHART  IX 

COURSE  OF  DOLLAR  EXCHANGE 

(CABLE  TRANSFERS) 

ON  PRINCIPAL  EUROPEAN  NEUTRAL  PLACES 

1914-1917 


llos"l->c3zoio:n:>-  zlJOh^i->ozai'=c  iz  -jOq.  i->ozoia:c>z  -ioE[h>o- 

ri<SozQTU.S<E    T=;<Soz  o.^  u.S<S->-><u>    oz  D  ->  1^S<S-.-.<mOZO. 


CREDIT  IN   THE   UNITED   STATES       343 

on  New  York  showed  a  heavy  depreciation.^  In  Decem- 
ber, 1915,  sales  of  American  securities  for  German  account 
through  Holland  caused  a  drop  in  exchange  which  led  to  a 
shipment  of  $500,000  in  gold  from  New  York  to  Amster- 
dam. Soon  after  that  time  Germans  also  sold  American 
obligations  on  the  Stockholm  market. 

The  main  cause,  however,  of  the  serious  decline  in  our 
bills  which  developed  in  1916  was  the  risk  and  cost  of 
transporting  gold.     Moreover,  the  restrictions  of  the  Brit- 
ish blockade  were  closely  drawn  against  the 
movement  of  gold  to  the  neutrals  and  thence  to       Turned 

°  .  against  us. 

Germany.  Otherwise  gold  would,  by  reason 
of  trade  balances,  have  been  moving  from  New  York  to 
Holland^  and  Scandinavia.  The  censorship  of  mails  and 
cargoes  by  British  patrol  boats,  it  is  reported,  delayed 
letters  from  New  York  to  Stockholm  seven  weeks.  Hence 
our  Swedish  trade  fell  off  in  a  marked  degree  in  1916  and 
1917  (from  exports  of  $78.2  millions  in  1915  to  $51.9  in 
1916  and  $45.1  in  1917). 

The  war  had  thrown  an  exceptionally  large  trade  to 
Germany  and  Russia  into  the  ports  of  Sweden,  Norway, 
and  Denmark.  With  this  favorable  balance  of  trade,  gold 
accumulated  in   Scandinavia.     Germany  was    ^ 

Scandmavian 

also  obliged  to  make  remittances  of  gold  to  Co-    gold 
penhagen.     With  Scandinavia,  as  later  with  us,    *^"°'^*°*- 
gold  imports  were  not  needed.     Their  central  banks  had 

'  Par  of  exchange  for  $1  on  these  countries  is  as  follows: 

Denmark,  Norway,  and  Sweden  (crown,  0.2680  cents) S.73 

Holland  (florin,  0.4020  cents) 2 .  48 

Spain  (peseta,  or  franc,  0.193  cents) 5 .  IBJ^ 

Switzerland  (franc,  0.193  cents) 5 .  18>g 

^  For  the  purchase  of  Sumatra  leaf  tobacco  at  the  spring  auction  in  1916  at 
Amsterdam,  some  $5,000,000  in  gold  was  allowed  to  pass  through  the  British 
blockade  from  New  York.  Exchange  was  about  43  cents  to  the  florin  (par 
0.4020  cents),  while,  even  at  high  costs  of  transportation,  the  gold  could  be 
delivered  in  Amsterdam  at  about  41.37  cents  per  florin. 


344  CREDIT  OF  THE  NATIONS 

been  obliged  by  law  to  pay  a  fixed  price  for  gold,  as  an 
encouragement  to  importations  of  gold.  So  full  were  the 
gold  reserves  of  these  banks,  and  so  low  were  bills  on 
New  York  and  London  (being  at  a  discount  of  6  per  cent), 
that  the  banks  asked  for  the  abolition  of  the  legal  re- 
quirement, since  they  could  obtain  gold  in  the  open  mar- 
ket at  much  less  than  the  fixed  price. 

Such  an  anomaly  in  exchange  was  not  the  only  one 
caused  by  the  war.     It  will  be  noticed  (in  Chart  VI)  that 
while  our  exports  were  increasingly  heavy,  and  while  im- 
rt  ports  of  gold  were  also  large,  in  1917,  that  very 

gold  to  Japan  considerable  exports  of  gold  began.  Wliile, 
an  pain.  £^^  military  and  political  reasons,  England  had 
been  using  every  effort  to  stabilize  exchange  by  sending 
gold  to  the  United  States,  English  exchange  did  not  stand 
so  high  in  other  markets  to  which  gold  could  not  be 
spared.  Consequently,  exchange  dealers  in  Spain  and 
Japan  found  it  profitable  to  send  their  bills  on  London  to 
be  sold  in  New  York.  Having  credits  here,  gold  was  de- 
manded for  export  to  Spain  and  Japan.  While  in  past 
years  exports  of  gold  to  these  countries  had  been  negli- 
gible, in  the  fiscal  year  1917  Spain  took  $70.3  millions 
and  Japan  $110.5.  That  is,  our  gold  was  being  used  to 
cover  English  trade  balances. 

The  matter  of  exchange  with  South  American  neutrals 
has  been  affected  by  very  different  considerations  from 
those  touching  other  neutrals.^     We  have  needed  their 

copper,  tin,  nitrates,  coffee,  and  wool.  The 
ex^hamge"       ^^^  largely  cut  off  the  European  demand  for 

these  products,  as  well  as  the  usual  supplies  of 
capital.  Formerly  their  trade  had  been  settled  by  bills 
on  London.  Could  these  settlements  be  made  by  bills 
on  New  York  (or  by  "dollar  exchange").'*     Here,  as  al- 

»  Cf.  myra,  pp.  315-317. 


CREDIT  IN  THE   UNITED   STATES       345 

ways,  exchange  reflects  the  movement  of  goods  and  cred- 
its. Since  we  had  shown  an  unexpectedly  great  power 
of  absorbing  our  returning  securities,  and  of  lending  to 
the  Allies,  it  might  be  supposed  that  we  could  provide  the 
capital  needed  for  developing  South  America  formerly 
supplied  by  Europe.  If  so,  and  if  we  are  willing  to  accept 
the  same  conditions  and  terms  of  credit,  we  may  expect 
more  trade  and  more  remittances.  But  hitherto  a  fairly 
large  trade  has  been  settled  according  to  established ' 
habits  and  currents  of  credit  through  London.  The  bal- 
ance of  trade  with  South  America  is  heavily  against  us, 
and  we  usually  pay  by  our  surplus  credits  on  Europe. 
When  our  tariff  allows  such  freedom  of  exchange  as  Eng- 
land offers,  and  when  we  can  bring  our  trade  nearer  to 
an  equilibrium,  we  shall  have  a  stronger  hold  on  credit 
and  exchange  among  our  Southern  neighbors.  The  ma- 
terial and  spiritual  leanings  of  South  America  are  toward 
Europe,  which  has  been  able  to  produce,  transport,  sell, 
and  loan  more  cheaply  than  we.  Unless  these  advantages 
are  more  or  less  destroyed  by  the  results  of  the  war,  Eu- 
rope will  still  remain  the  dominant  power  in  South  Am- 
erican trade  and  exchange.  The  estabhshment  of  North 
American  banks  there  will  no  doubt  aid  in  familiarizing 
them  with  exchange  on  New  York  and  Boston.  We  may 
gain  trade.  But  we  are  not  likely  soon  to  dethrone  Europe. 
For  many  decades  our  flirtation  with  silver  caused  a  loss 
of  confidence  among  foreign  countries  in  the  stability  of 
our  standard.  That  we  must  live  down.  When  we  are 
able  to  discount  acceptances  on  any  scale  sent  by  foreign 
countries,  and  at  a  rate  equal  to  or  lower  than  London  and 
Hamburg,  we  may  then  see  the  world  drawing  "dollar  ex- 
change" instead  of  sterling  exchange  as  now. 

To  carry  out  the  process  establishing  "dollar  exchange," 
we  must,  if  necessary,  be  willing  and  able  to  do  without  the 


346  CREDIT  OF  THE  NATIONS 

use  of  foreign  capital.  Thus  far  we  have  depended  on  Lon- 
don, for  instance,  in  carrying  the  exports  of  our  cotton  and 
wheat.  The  American  exporter,  as  previously  explained, 
draws  a  bill  on  the  English  importer,  which,  by  an  arrange- 
ment between  the  latter  and  some  English  bank,  will  be  ac- 
cepted by  it.  A  New  York  bank,  having  bought  this  bill 
from  the  American  exporter,  sends  it  to  the  English  bank 
for  acceptance;  then,  for  the  period  until  its  maturity,  it 
remains  as  a  piece  of  discountable  paper  in  the  English 
acceptance  market.  Meanwhile  the  New  York  bank  has 
sold  sight  exchange  against  its  London  credit  and  freed 
its  funds.  If  we  aspire  to  have  "dollar  exchange"  drawn 
on  us,  it  means  that  we  should  be  able  to  do  what  London 
has  hitherto  done.  That  is,  we  must  expect  a  new  situ- 
ation somewhat  as  follows:  The  English  importer,  or  his 
bank,  will  arrange  with  a  New  York  bank  to  accept  the 
bill  drawn  on  the  English  buyer  by  the  American  exporter; 
then  the  bill  will  remain  here  in  our  own  acceptance  market 
until  maturity,  carried  by  our  own  banks.  At  maturity, 
according  to  the  arrangement,  the  English  buyer  or  bank 
will  put  the  New  York  acceptor  in  funds  to  pay  it  off. 
Such  an  outcome  requires  a  rate  of  interest  as  low  here  as 
in  London,  and  a  surplus  of  capital  available  for  carrying 
any  needed  amount  of  exchange  on  foreign  countries.  Per- 
haps some  of  these  operations  may  go  on  in  a  temporary 
emergency,  such  as  that  created  by  the  present  war,  but 
it  can  be  done  permanently  only  if  our  capital  in  the  ac- 
ceptance market  is  as  abundant  as  that  of  London. 

§  7.  The  coming  of  gold  in  large  amounts  to  this 
country,  as  a  partial  offset  to  our  phenomenal  exports  of 
goods,  has  created  some  fear  of  inflation  in  our  money 
and  credit.  On  the  other  hand,  it  has  been  regarded  as 
placing  our  credit  system  in  a  strong  position  if  the  great 


CREDIT  IN  THE  UNITED   STATES       347 

volume  of  gold  is  left  mainly  in  the  hands  of  the  Federal 
Reserve  Board,  so  that,  when  the  after-war  adjustment 
becomes  necessary,  it  can  regulate  the  movement  of  gold 
in  the  common  interest.  Nevertheless,  the  large  imports 
of  gold  have  raised  the  question  of  possible  inflation,  lead- 
ing to  an  unsafe  expansion  of  industry,  a  fictitious  rise 
of  prices,  and  an  era  of  speculation. 

In  this  matter  there  is  involved  not  only  the  question 
of  the  currency,  but  of  credit.  As  regards  both,  there  is 
thus  introduced  the  inevitable  issue  as  to  the  validity  of  the 
quantity  theory  of  money.  It  is  assumed  that 
the  new  gold  increases  our  currency,  and  by  be-  money  and 
ing  offered  for  goods  raises  prices.  This  part  of  "^  **  ^"^  ' 
the  theory  is  now  given  little  attention,  since  more  recently 
emphasis  has  been  laid  on  the  effect  of  an  increase  in 
banking  reserves. 

But  as  regards  the  currency,  now  that  we  are  entering 
on  a  war  requiring  unprecedented  expenditures,  the  im- 
ports of  gold  are  of  surpassing  value  in  enabling  ns  to  hold 
fast  to  a  gold  standard.     On  the  most  critical     .  ^     , 

.       „  .  Advantage  or 

question  m  financmg  a  great  war — on  which  large  gold 
even  England  for  a  time  vacillated — our  govern-  ^  "'^  * 
ment  has  so  far,  to  its  great  credit,  never  even  raised  the 
possibility  of  attempting  to  borrow  by  issuing  paper 
money  in  any  form.  In  this  great  emergency,  for  the  first 
time  in  our  history,  there  has  been  no  confusion  between 
the  fiscal  and  the  monetary  functions  of  the  Treasury. 
Until  very  recently  no  attention  has  been  even  called  to 
this  matter.  One  can  hardly  place  too  much  emphasis  on 
this  piece  of  good  fortune,  or  this  exhibition  of  conscious 
intelligence — whichever  we  may  call  it.  From  the  devas- 
tating evils  of  a  depreciated  standard  we  are  apparently 
to  be  delivered.  But  if  gold  had  been  going  out  of  the 
country,  if  we  had  not  the  great  good  fortune  of  an  enor- 


348  CREDIT  OF  THE  NATIONS 

mous  excess  of  exports,  if  we  had  had  to  undergo  great 
sacrifices  to  obtain  the  gold  to  preserve  our  standard,  who 
does  not  reaHze  from  what  an  epidemic  of  political  dema- 
gogy we  should  have  been  suffering  ?  The  advantage  of 
the  large  stock  of  gold  has  thus  been  of  far  greater  value 
than  any  one  has  realized.  All  our  prices  are  gold  prices; 
and  there  has  been  created  no  paradise  for  speculators 
built  on  fluctuations  of  prices  due  to  the  fluctuations  of  a 
changing  standard.  For  this  blessing  let  us  be  duly 
grateful. 

The  main  contention,  however,  must  centre  on  the 
effect  of  the  increasing  volume  of  gold  upon  an  inflation 
of  credit,  through  an  increase  of  bank  reserves  and  of 

the  lending  power  of  the  banks.  Here  is  the 
Seo°*^*^  real  issue.     And  in  this  part  of  the  question 

assumed  as  we  shall  find  that  the  archaic  and  fallacious 
of  credit         quantity  theory  does  not  explain  the  facts. 

For  instance,  the  old  Ricardian  formula  has 
been  appealed  to,  that  our  vast  imports  of  gold  would 
raise  prices  here,  cause  greater  imports  of  goods,  resulting 
later  in  exports  of  gold.^  The  trouble  with  this  outgrown 
theory  is  that  this  order  of  causal  events  does  not  agree 
with  the  facts,  and  that  prices  are  influenced  by  many 
other  forces  not  even  hinted  at  in  speaking  only  of  the 
quantity  of  the  circulation. 

The  pivotal  point  is  the  effect  of  large  imports  of 
gold  in  j)roducing  an  inflation  of  credit  which  thus  be- 
comes the  cause  of  a  rise  of  prices.  It  is  urged  that  an 
increase  of  bank  reserves  encourages  an  expansion  of  credit, 
and  that  additional  purchasing  power,  following  the  ex- 
pansion of  credit,  is  a  familiar  and  inevitable  fact.^    A  man 

'  In  sujjport  of  this  discussion,  reference  has  been  made  to  SeHgman,  Princi- 
ples of  Economics,  pp.  465-466. 

^  Cf.  National  City  Ba7ik  Bulletin,  November,  1916,  p.  3.  But  it  is  also 
noted  by  the  same  publication  that  at  the  end  of  1916  there  had  been  no  undue 
expansion,  in  fact,  and  that  the  danger  was  as  yet  only  theoretical. 


CREDIT  IN  THE   UNITED   STATES       349 

walking  down  Fifth  Avenue  may  knock  a  woman  down, 
but  merely  because  he  is  so  walking  it  does  not  follow  that 
he  will  knock  a  woman  down.     In  such  theo- 

Large 

rizing  about  the  effect  of  enlarged  reserves  reserves  do 
a  vital  rule  in  banking  practice  is  ignored.  It  necessarily 
is  assumed  that,  if  reserves  increase,  poor  loans  ^"^^s  i^g® 
will  be  made;  that  what  may  happen,  must 
happen.  In  short,  that  if  the  banks  can  lend,  they  are 
sure  to  abuse  their  lending  power,  and  not  scrutinize 
the  assets  offered  as  they  should  do.  For  in  no  other  way 
can  there  be  inflation  of  credit.  If  legitimate  short-time 
loans  have  been  made  because  of  increased  gold  reserves, 
then  they  will  be  liquidated  on  maturity;  and,  if  necessary, 
loans  can  be  contracted  without  disaster.  Liquidation  is 
impossible  only  if  the  assets  are  unliquid.  Therefore, 
assuming  legitimate  banking,  there  can  be  inflation  only 
when  an  increase  of  loans  (and  deposits  consequent  on 
loans)  is  not  based  on  a  corresponding  increase  of  quick  as- 
sets representing  the  movement  of  salable  goods  or  securi- 
ties. Loans  can  be  safely  increased,  so  long  as  assets  are 
sound  and  liquid.  The  question  the  banker  must  ask  is. 
If  my  reserves  are  above  the  legal  limit,  is  the  loan  of- 
fered a  safe  one  ?  To  say  that,  because  reserves  are  large, 
bankers  will  no  longer  exercise  good  judgment  in  making 
loans,  is  not  a  good  ground  on  which  to  build  up  a  theory 
of  prices. 

Indeed,  the  very  facts  of  record  in  this  period  of  large 
gold  imports  work  against  such  theorizing.  In  Novem- 
ber, 1914,  when  the  Federal  Reserve  system  was  put  into 
operation,  the  lowered  requirements  for  re- 
serves  were  a  matter  of  wide  publicity.  The  against  the 
rise  of  surplus  reserves  for  the  New  York  ^°^' 
banks  alone  from  about  $14,000,000  to  $140,000,000 
(above  the  new  legal  limit)  was  marked  and  known  of  all 


350  CREDIT  OF  THE  NATIONS 

men  (although  actual  reserves  did  not  change  much), 
and  yet  loans  of  the  same  banks  in  the  turbulent  days  of 
November  and  December,  1914,  showed  no  increase.  (See 
Chart  VIII.)  We  heard  much  at  the  time  about  the 
banks  having  the  power  to  increase  loans  by  $3,000,000,- 
000  if  they  wished.  But  they  did  not  wish.  It  cannot 
be  assumed  by  theorizers,  therefore,  that  an  increase  of 
reserves  must  be  inevitably  followed  by  an  expansion  of 
credit,  an  increase  of  purchasing  power,  and  a  consequent 
rise  of  prices.^  The  causes  affecting  the  level  of  prices 
are  too  numerous  to  allow  any  one  cavalierly  to  give  a 
quick  solution  by  assigning  an  increase  of  money  and  credit 
as  the  one  controlling  cause. 

The  presence  of  the  new  Federal  Reserve  Banks  in  the 
situation  (November  16,  1914)  after  the  crisis  had  passed 
the  climax  and  had  been  dealt  with  by  devices  belonging 
to    the    old    banking    regime,    produced    no 
Federal  marked  positive  effects  on  credit.     The  main 

Reserve  effect  has  bccu  psychological.     The  new  sys- 

tem has  acted  as  a  gyroscope  to  stabilize  the 
whole  machinery  of  banking  and  credit.  It  is  now  well 
understood  that  there  never  need  be  again  a  grasping 
after  reserves,  so  long  as  member  banks  hold  rediscount- 
able  paper.  There  can  never  again  be  any  paroxysms  of 
credit  in  which  loans  are  called  and  legitimate  borrowers 
are  vmable  to  obtain  credit  and  acceptable  means  of  pay- 
ment. The  whole  emphasis  is  to  be  placed  on  the  qual- 
ity of  the  loans  made,  and  not  upon  the  amount  of  the 

•  Reference  has  been  made  to  the  very  great  expansion  of  European  curren- 
cies, and  the  temptation  has  arisen  to  ascribe  high  prices  there  to  the  increased 
circulations  and  to  enlarged  credit.  Yet  from  the  same  quarter  comes  the 
admission  that  the  heavy  depression  produced  by  the  war  has  prevented  ex- 
pansion, especially  in  Europe.  If  so,  the  striking  rise  of  European  prices  can- 
not be  ascribed  to  expansion  of  money  or  credit.  Of  course,  if  the  paper  money 
became  inconvertible  and  depreciated,  prices  would  rise;  but  that  is  a  horse 
of  another  color. 


CREDIT  IN  THE  UNITED   STATES       351 

circulation  or  the  percentage  of  reserves.  Such  devices 
as  the  cotton  pool  are  now  made  obsolete  by  the  Federal 
Reserve  system. 

This  is  not  the  place  to  estimate  the  full  value  of  the 
new  system  in  various  ways  to  our  trade  and  credit. 
But  in  regard  to  the  large  imports  of  gold,  and  to  the 
matter  of  inflation,  its  policy  is  of  importance. 
The  old  tendency  of  individual  banks  to  store  sys^tem^an 
up  gold  has  not  entirely  given  way  to  a  reli-  check 
anceon  rediscounts.  An  institution  capable  of 
taking  the  leadership  in  dealing  with  gold  exchange  and 
aiding  in  the  most  effective  management  of  our  stock  of 
gold,  when  questions  as  to  its  import  or  export  arise,  has 
never  before  existed  among  us.  It  can  now  play  a  pow- 
erful and  constructive  part  in  our  international  as  well  as 
in  our  domestic  operations  of  credit.  It  can  do  much 
judiciously  to  prevent  the  expansion  of  illegitimate  credit 
at  home  by  its  use  of  the  rediscount  function  in  any 
period  when  the  public  seems  to  be  losing  its  head.^  Lit- 
tle heed  need  be  given  to  the  expansion  of  the  Federal 
Reserve  notes,  provided  the  present  law  remains  un- 
changed, by  which  these  notes  are  not  allowed  to  be 
counted  in  the  reserves  of  member  banks.  In  this  way 
the  expansion  of  the  circulation  may  go  on  under  a  nor- 
mal demand  for  currency;  but  it  is  fully  inhibited  from 
passing  over  into  an  uncontrolled  influence  in  expanding 
credit.  Thus  the  increase  of  the  circulation  in  itself  need 
not  be  a  cause  of  inflation  by  the  member  banks.  The 
retention  of  this  feature  of  the  Act  is  quite  as  important 

'^  Inflation  of  credit  can  best  be  checked  at  its  first  appearance  in  the  member 
bank.  The  existing  Act  could  be  improved  by  an  amendment  charging  a 
commission,  rising  in  amount  as  the  percentage  of  rediscounts  to  the  capital 
of  the  bank  rises,  in  addition  to  the  uniform  rate  of  interest  fixed  for  each 
district.  Such  a  device,  however,  will  be  serviceable  only  when  the  banks 
make  a  greater  use  than  now  of  the  rediscounting  privilege. 


352  CREDIT  OF  THE   NATIONS 

as  the  policy  of  the  Federal  Reserve  Board  in  trying 
to  draw  gold  into  its  hands  by  advancing  the  time  when 
member  banks  should  finish  paying  in  their  deposits,  since 
both  aim  against  expansion  of  credit.  If  other  than  gold 
money  enters  into  reserves  of  banks,  the  control  of  infla- 
tion, of  course,  is  not  gained  merely  by  the  control  of  gold. 
At  present  the  Federal  Reserve  notes  are  so  hedged  about 
by  safe  restrictions,  and  so  well  supported  by  gold,  that 
their  volume  can  create  no  concern.^  Their  amount  can, 
therefore,  be  left  to  automatic  adjustment. 

That  a  rise  of  prices,  however,  has  gone  on  contempora- 
neously with  the  imports  of  gold  there  can  be  no  question. 
But  it  by  no  means  follows   that  the   imports  of   gold 

are  the  cause  of  the  higher  prices.  It  should 
Gold  and         ^^  noted  at  once  that  the  question  of  prices 

transcends  the  limits  of  influence  ascribable 
to  the  increase  of  the  gold  circulation;  for  prices  have  risen 
as  markedly  in  the  countries  from  which  the  gold  has 
come.  Such  facts  show  that  other  causes  are  more 
potent  than  the  quantity  of  the  circulation. 

While  there  is  no  place  here  for  any  extended  study  of 
prices,  the  appearance  of  certain  general  causes  are  so 
obvious  that  they  may  be  briefly  introduced.     With  us 

there  has  been  no  depreciation  of  our  standard 

Other  causes  .  i       •    n  pi  •      • 

affecting  of  priccs;  SO  that  the  mfluence  of  depreciation 

pnces.  ^£  money  upon  prices,  as  in  Germany,  may  be 

eliminated  at  once.  The  non-monetary  causes,  on  the 
other  hand,  are  conspicuous:  (1)  He  who  runs  can  read  the 
effects  of  an  extraordinary  scarcity  of  labor,  an  intense  de- 

*  Contraction,  which  may  come  with  the  cessation  of  war,  is  quite  another 
matter.  Whether  we  are  called  upon  for  gold  or  not  will  depend  upon  the 
future  relation  between  exports  and  imports  of  goods  and  securities.  Of  course 
our  exports  of  war  supplies  will  cease.  In  the  then  period  of  readjustment  a 
hand  upon  the  brake  may  be  desirable  in  steadying  the  movement  of  gold 
and  its  effect  upon  credit. 


CREDIT  IN  THE  UNITED  STATES       353 

mand  for  It,  especially  In  munition  factories  and  In  govern- 
ment employ,  magnified,  of  course,  as  the  armies  are  with- 
drawn, which  have  resulted  In  a  very  great  rise  of  wages 
for  the  same  degree  of  efficiency.  The  Inevitable  outcome 
In  raising  expenses  of  production  and  the  prices  of  goods 
has  followed  and  Is  a  matter  of  common  observation.  (2) 
The  effect  of  the  war  In  destroying  shipping  has  obviously 
brought  about  higher  rates  of  transportation  by  sea,  and  on 
a  scale  never  before  equalled.  Higher  freights  on  imports 
have  raised  our  prices.  (3)  The  withdrawal  of  men  from 
agriculture  In  Europe  has  lessened  the  crops  of  the  world, 
created  an  Intense  demand  for  our  breadstuffs  and  other 
exports,  and  this  fierce  competition  has  raised  prices  to 
our  own  consumers.  Irrespective  of  the  expenses  of  pro- 
duction. (4)  Moreover,  the  exceptional  European  de- 
mand for  our  coal,  sugar,  steel,  copper,  and  the  like,  have 
raised  to  us  the  prices  of  all  materials  of  manufacture  to 
a  scarcity  level.  Here,  In  brief  mention,  are  listed  forces 
working  to  raise  prices  which  have  no  relation  whatever 
to  the  volume  of  the  circulation,  or  to  the  expansioYi  of 
credit.  In  the  face  of  such  facts  It  seems  like  bigotry,  or 
stubborn  pride  of  opinion,  to  revert  to  the  obsolete  theory 
that  the  rise  of  prices  can  be  accounted  for  only  by  the 
quantity  of  money  In  circulation,  or  by  the  Increase  of 
bank  reserves.  At  the  best  It  is  only  a  one-sided  theory 
which  omits  such  powerful  forces  from  consideration  under 
an  alibi  usually  termed  "other  things  being  equal."  On 
this  price  question  the  "other  things"  have,  like  the  whole 
body  of  the  camel,  pushed  into  the  tent  of  the  quantity 
theorists  until  they  have  occupied  the  whole  space. 

§  8.  Since  credit  is  a  means  of  passing  capital  from 
the  one  creating  it  to  the  one  using  It,  we  are  obviously 
concerned  with  the  forces  behind  the  supply  of  capital. 


354  CREDIT  OF  THE  NATIONS 

The  sudden  outbreak  of  the  European  War  so  disorgan- 
ized our  trade  and  so  disarranged  the  ordinary  machinery 

of  credit  that,  although  we  were  not  then  in- 
demand^  volved  in  the  struggle,  it  was  regarded  as  an 
upon  our  indescribable  calamity  to  us.    Like  other  young 

nations,  we  had  been  borrowing  capital  from 
abroad  for  the  development  of  our  own  resources.  What 
would  happen  to  us,  a  debtor  country,  if  we  were  cut  off 
from  the  use  of  this  foreign  capital  by  the  return  of  our 
$6,000,000,000  of  securities.'^  It  was  a  staggering  ques- 
tion. But,  if  it  had  been  added  that  we  must  not  only 
take  back  a  large  part  of  our  investments,  but  even  be 
called  on  to  make  enormous  loans  to  other  countries,  the 
proposal  would  have  been  regarded  with  undisguised  in- 
credulity. Then,  if,  on  top  of  all  these  demands,  it  were 
prophesied  that  we  must  loan  untold  billions  to  our  own 
government,  even  optimistic  persons  would  have  frankly 
said  that  it  was  clearly  impossible.  How  could  a  debtor 
nation  suddenly  become  a  creditor  nation  on  a  most  im- 
posing scale?  This  is  one  of  the  amazing  revelations  of 
the  war.  Out  of  what  seemed  inevitable  calamity,  could 
there  come  such  material  advantages  ? 

The  cross-currents  and  contradictions  of  this  war  often 
appear  inexplicable.  It  is  because  unexpected  results 
have    been    set    in    operation    by    psychological    forces 

which  could  not  have  been  estimated  before- 
Possibiiic?       hand.     Not  the  least  important  of  these  is  the 

of  saving.  ^ 

psychology  of  capital-makmg.  No  one  has 
doubted  the  phenomenal  productive  capacity  of  the  United 
States.  The  energizing  influence  of  the  new  era  of  power 
and  machinery  has  been  displayed  on  the  vast  natural 
resources  of  this  country  in  an  expanding  volume  of  prod- 
ucts unequalled  by  any  other  nation.  As  a  consequence, 
the  estimated  national  wealth  of  the  United  States  has 


CREDIT  IN  THE  UNITED   STATES       355 

been  placed  at  $187,000,000,000^  in  1912  as  against  $88,- 
000,000,000  in  1900.  Such  is  the  basis  on  which  the 
supply  of  capital  rests.  Long  since  it  has  been  an  eco- 
nomic commonplace  to  say  that  saving  of  capital  depends 
on  two  things:  (1)  The  extent  of  the  margin  above  the  nec- 
essaries of  life  from  which  savings  can  be  made;  and  (2) 
the  strength  of  the  desire  to  save.  As  regards  this  mar- 
gin, we  have  never  realized  its  extent.  In  recent  decades 
we  have  seen  the  rise  of  large  fortunes  and  a  display  of 
extravagance  which  has  advertised  in  every  possible  way 
our  enormous  capacity  for  consumption  in  things  not 
actually  necessary  to  physical  existence.  No  one  can  be- 
gin to  estimate  what  would  be  the  effect  on  the  accumula- 
tion of  American  capital  if  all  or  even  a  large  part  of  this 
margin  were  saved.  We  have  never  fully  recognized  that, 
as  things  have  been  going  on  in  times  of  peace,  the  use- 
less destruction  of  wealth  by  expenditure  on  unnecessary 
consumption — articles  which  when  consumed  leave  noth- 
ing in  their  stead — has  constantly  been  as  great  as  that 
caused  by  vast  armies  in  time  of  war.  Then  apply  to  our 
uncounted  billions  of  surplus  above  necessaries  an  excep- 
tional stimulus  to  the  will  to  save.  The  effect  may  seem 
like  a  miracle,  but  it  is  all  within  the  limits  of  achieve- 
ment, if  we  so  wish.^  When  the  war  broke  out,  the  un- 
certainty caused  by  the  shock  and  the  general  depression 
induced  by  the  world-wide  disaster  almost  unconsciously 

>  Cf.  Estimated  Valuation  of  National  Wealth,  1850-1912,  Bureau  of  the 
Census,  1915,  p.  15. 

-  It  was  long  ago  explained  that  countries  with  a  simple  economic  organiza- 
tions when  devastated  by  war  recover  with  startling  rapidity,  provided  produc- 
tive laborers  are  returned  to  the  soil  and  to  factories.  If  supplied  with  only  the 
scanty  capital  sufficient  to  cover  the  means  of  subsistence  and  the  minimum  of 
the  necessary  implements  of  production,  in  a  very  short  time  a  country  by  such 
enforced  saving  will  accumulate  as  large  a  capital  and  will  turn  out  as  much 
wealth  as  before  the  war.  The  situation  is  one  which  develops  enforced  saving. 
Of  course  new  and  expensive  equipment  must  wait. 


356  CREDIT  OF  THE  NATIONS 

led  every  one  to  economize.     Not  one  of  our  appliances 

of  production,  nor  any  of  our  resources,  had  ceased  to 

exist.     For  a  time  the  wheels  of  industry  ran 

Effect  of  the  . 

war  on  at  low  Speed ;  yet  the  loss  was  not  in  the  fac- 

saving.  ^^^g  ^£  production,  but  onl}^  in  the  temporary 

reduction  of  our  usual  output.  In  this  period  there  was 
much  idle  capital  and  rates  of  discount  were  low.  The 
crops  of  1914  had  been  very  large,  but  there  had  been  no 
new  enterprises  started,  and  no  revival  of  trade.  As  a 
consequence,  accumulations  on  a  large  scale  were  dammed 
up  waiting  for  emploj^ment.  The  floating  capital  sufficed 
to  take  up  our  returning  securities.  Moreover,  wide- 
spread economy  was  aided  by  a  cessation  of  expenditure 
for  European  travel.  Under  various  influences  working 
to  repress  unnecessary  consumption  capital  was  silently 
being  accumulated.  Estimating  American  savings  by 
the  amounts  of  new  securities  floated  each  year  and  by 
the  rise  of  savings  accounts,  the  normal  annual  addition 
to  our  capital  before  the  war  was  at  a  low  estimate  far 
beyond  a  billion  dollars.  But  after  the  readjustment  had 
been  made  in  1915  to  the  new  war  conditions,  by  1916 
the  wheels  of  industry  and  all  the  factors  of  production 
began  to  move  at  the  highest  possible  speed.  Under  these 
conditions  enormous  accumulations  of  capital  were  pos- 
sible. Apply  to  these  possibilities  the  magic  of  any  new 
incentive  to  saving,  such  as  a  patriotic  call  to  invest  in  a 
government  loan,  and  the  results  may  well  seem  aston- 
ishing. There  is,  however,  no  miracle.  The  result  is  the 
outcome  of  a  stimulated  desire  to  save,  working  upon  a 
vast  margin  over  and  above  the  necessaries  of  life.  It 
is  an  illustration  of  the  psychology  of  capital-making. 
It  is  the  only  convincing  explanation  of  the  means  by 
which  we  so  suddenly  changed  from  a  debtor  to  a  creditor 
nation. 


CREDIT  IN  THE  UNITED   STATES       357 

Nevertheless,  the  transfer  of  capital  to  the  borrower 
by  credit  is  not  as  popularly  conceived.  Wealth  may 
have  its  value  expressed  in  money,  but  the  title  to  wealth 
may  be  transferred  without  the  use  of  money. 
So  with  capital.  But  also,  much  capital,  like  capital  is 
mills,  furnaces,  factories,  steamships,  are  in  a  b^redu**^ 
form  which  cannot  be  passed  from  hand  to  to  the 
hand.  One  subscribing  $1,000  to  a  govern-  ^°^^ 
ment  loan  cannot  give  a  part  of  his  fixed  capital,  nor  of 
his  cattle.  He  pays  supposedly  in  money,  but  money  is 
very  little  used  in  such  operations.  In  fact,  through 
credit  he  obtains  a  means  of  payment  by  which  he  pays 
for  his  bond.  He  gets  the  right  to  draw  on  such  a  credit 
if  he  has  bankable  wealth  or  property  (including  securities, 
which  are  titles  to  wealth) .  By  credit  he  is  able  to  obtain 
an  acceptable  means  of  payment  based  on  bankable  wealth. 
In  such  a  case  he  transfers  to  the  government  a  claim  in 
the  form  of  general  purchasing  power  over  goods.  For- 
merly he  directed  its  consumption;  now  the  govern- 
ment directs  its  consumption.  He  foregoes  all  use  of  that 
wealth  (or  capital)  and  gets  in  return  a  bond  and  annual 
interest.  He  may  have  formerly  used  up  wealth  out  of 
his  income  to  the  amount  of  $1,000,  but  now  by  buy- 
ing a  bond  he  has  saved  it,  even  though  the  government 
uses  it  for  munitions  of  war.  But  still  it  cannot  be  as- 
sumed that  a  large  loan  is  wholly  obtained  from  new  sav- 
ings. Only  to  the  extent  that  people  economize  and  are 
thereby  enabled  to  pay  for  bonds  is  that  true. 

To  a  large  extent  loans  come  from  those  who  already 
have  capital.     One  man  may  pay  for  his  bond  out  of  his 
running   bank   balance;   but  in  that  case  he 
transfers  to  the  government  a  claim  on  the  ac-     ^^J^rom^^ 
tive  funds  of  the  country,  since  the  bank  has 
invested  what  was  left  with  it  in  the  industrial  operations 


358  CREDIT  OF  THE   NATIONS 

of  the  country  (which  appear  in  bank  assets).  The  gov- 
ernment passes  that  claim  to  a  mill  for  steel  plates,  and 
legions  of  such  claims  are  offset,  as  usual,  through  clear- 
ing-houses. No  money  need  pass.  Other  persons,  for  in- 
stance, may  sell  securities  in  order  to  buy  the  government 
bonds.  Securities  are  titles  to  wealth  and  income.  When 
they  are  sold,  the  seller  has  a  sum  to  his  credit  at  a  bank; 
and  the  process,  then,  is  the  same  as  that  just  described. 
The  government  gets  a  claim  against  present  goods  in  re- 
turn for  giving  a  promise  to  pay  in  the  future.  The  trans- 
action is  thus  purely  a  credit  operation  involving  the  ex- 
change of  goods,  with  an  obligation  to  return  an  equiva- 
lent in  the  future.  The  extent  to  which  a  government  can 
borrow  depends  upon  the  quantity  of  goods  it  can  take  un- 
der its  control  without  lessening  the  general  productive 
capacity  of  the  country.  The  amount  of  money  in  circu- 
lation or  in  bank  reserves  has  little  to  do  with  it.  That 
quantity  of  money  is  needed  which,  according  to  the  coun- 
try's monetary  habits,  will  provide  the  usual  mechanism  of 
exchange  in  circulation  or  bank  reserves  for  doing  the 
work,  whether  it  is  concerned  with  a  volume  of  peace  or 
of  war  goods.  Of  course  clumsy  management  by  the 
Treasury  might  call  for  loans  to  be  paid  in  by  subscrib- 
ers in  specified  kinds  of  money  and  then  not  disburse  them 
promptly  enough  to  have  them  reach  their  former  equihb- 
rium  before  new  loans  were  offered;  only  in  such  a  case 
would  the  monetary  supply  seem  to  be  insufficient. 

\Mien  in  the  course  of  the  rapid  extension  of  our  ex- 
ports it  came  to  be  evident  that  payment  of  balances 
could  not  well  be  made  in  gold,  credit  operations,  run- 
ning forward  into  the  future,  were  inevitable.  As  we  have 
seen,  the  quantity  of  our  securities  returned  from  Europe 
were  an  inadequate  offset  for  the  sum  owing  us  on  balance. 
Hence,  loans  to  the  Allies  were  a  logical  sequence  to  the 
enormous  purchases  of  our  goods;  and  the  beginning  of 


CREDIT  IN   THE   UNITED   STATES       359 

these  loans  coincides  with  the  time  when  our  exports  began 
to  expand.     Hitherto  we  had  looked  askance  at  the  se- 
curities  of   foreign  governments,  but  foreign 
loans,  if  we  could  float  them,  were  an  inter-    i-oansto 

1  •  nr  1  n  '    1     °"''  Allies 

national  necessity.  Moreover,  the  financial  inevitable 
position  of  Great  Britain  was  shown  to  be  iarg"e^exports. 
very  strong,  while  France,  a  weaker  sister, 
was  supported  by  the  former.  Then  came  the  first  of  an 
important  series  of  credit  transactions  between  foreign 
countries  and  ourselves,  which  may  be  regarded  as  the 
inaugural  of  a  new  era  for  us  in  the  sphere  of  international 
credit.  In  order  to  pay  for  their  purchases  of  our  goods, 
loans  were  offered  with  the  understanding  that  the  pro- 
ceeds would  be  expended  here.  That  is,  our  investors 
gave  the  Allies  general  purchasing  power,  which  was  at 
once  transferred  to  the  sellers  of  our  goods,  who,  of  course, 
had  accounts  in  the  same  group  of  banks  through  whom 
the  loans  were  managed.  The  foreign  buyers  had  pledged 
us  payment  in  the  future.  Again,  there  was  here  no 
reason  for  the  use  of  money  to  any  important  extent, 
except  in  adjusting  balances  between  our  banks;  and 
credit  appeared  here,  also,  in  making  offsets.  Credit  of 
the  nations  plays  a  more  and  more  important  role  as  the 
transactions  in  the  war  grow  larger. 

The  loans  to  foreigners  have  taken  different  forms.  The 
first  feeler  in  our  market  was  a  loan  of  $10,000,000  to 
France  for  one  year,  November  5, 1914,  which  was  granted 
and  paid  off  at  maturity.  Early  in  1915,  apro- 
pos of  the  proposed  market  for  acceptances  here  j^^'j  foreign 
and  the  creation  of  paper  which  lending  banks 
might  offer  for  discount  at  the  Federal  Reserve  Banks, 
$25,000,000  of  Russian  acceptances  were  offered.  To  allow 
Russia  to  buy  of  us,  our  bankers  agreed  to  accept  six-month 
bills  drawn  on  them  for  purchases  from  American  houses. 
This  method  seems  to  have  been  discouraged  and  the  bills 


360  CREDIT   OF  THE   NATIONS 

were  paid  off.  There  seems  to  have  been,  on  the  other 
hand,  a  strong  preference  here  for  collateral  loans.  In  the 
summer  of  1915  a  loan  was  negotiated  for  France  by  the 
Rothschilds,  amounting  to  $43,000,000,  on  the  deposit  of 
bonds  of  the  Pennsylvania  and  St.  Paul  Railways.  A 
well-known  banking-house  offered  in  New  York  a  one- 
3'ear  collateral  loan  guaranteed  by  the  Bank  of  France 
for  $20,000,000,  on  which  acceptances  were  sold.  Much 
later  eight  London  joint-stock  banks  united  to  establish 
a  credit  here  of  $50,000,000  for  six  months,  but  it  was  re- 
newed at  maturity  at  a  higher  rate.  The  selling  of  Eng- 
lish Treasury  bills  in  our  market  was  once  deprecated  by 
the  Federal  Reserve  Board,  as  tending  to  load  up  mem- 
ber banks  with  unliquid  paper,  on  the  assumption  that 
the  bills  would  not  be  paid  off,  but  renewed,  and  thus  be 
in  effect  long-terra  paper;  but,  later,  large  sums  of  these 
bills  have  been  sold  here. 

The  one  large  loan,  however,  which  tested  our  attitude 
to  borrowings  by  foreign  governments,  and  which  was 
forced  by  the  condition  of  sterling  exchange,  was  the 

Anglo-French  five-year  5  per  cent  external 
Anglo-French    i^^^  f^j.  $500,000,000  in  October,   1915,  the 

result  of  the  efforts  of  an  English  and  French 
commission.  These  bonds  are  the  joint  obligation  of  the 
British  and  French  Governments,  payable  at  the  end  of 
five  years,  or  convertible  at  option  into  4H  per  cent 
15-25  year  bonds.  A  syndicate  of  bankers  from  many 
cities  took  the  whole  issue  at  96^,  offering  the  bonds  to 
the  public  at  98,  to  yield  about  5}-^  per  cent  to  the  in- 
vestor.^ This  was  the  first  foreign  loan  of  any  magnitude 
to  be  placed  in  this  country. 


*  It  appears  that  at  the  close  of  the  sixty  days  set  for  the  syndicate, 
000,000  were  withdrawn  for  investment  at  96 1^,  $40,000,000  sold  to  the  public 
at  98,  and  the  remaining  $180,000,000  distributed  to  members  of  the  syndicate 
through  whom  the  bonds  were  sold  in  the  open  market.  They  have  since 
sold  under  85. 


CREDIT  IN   THE   UNITED   STATES       361 

Since  then,  in  1916  and  1917,  before  we  entered  the 
war,  other  loans  have  been  placed  here  by  Great  Britain, 
France  (one  for  $94,500,000  through  the  American  For- 
eign  Securities   Company) — Paris,  Bordeaux,    _  . 

.  .  Private  loans 

Lyons,  Marseilles — Russia,  Italy,  Switzerland,    to  foreign 
Norway,  Canada,  Newfoundland,  Argentine,    •=°"°*"^^- 
and  China,  totallmg  $1,570,000,000.1     Immediately  after 
we  entered  the  war  our  government,  on  April  25,  1917, 
by  virtue  of  the  Act  of  April  24,  1917,  made  the  first 
direct  loan  to  the  Allies,  one  of  $200,000,000    ,        ^    ^ 

,      .  _^  Loans  by  the 

to   Great  Britam.     To  September  25,   1917,    United 
the  total  of  loans  to  Great  Britain,  France,     ^***®^- 
Italy,  Russia,  Belgium,  and  Serbia  by  the  government 
of  the  United  States  dhect  was  $2,426,400,000.2     It  was 
then  no  longer  necessary  for  the  Allies  to  place  loans  in 
our  open  market. 

In  addition,  various  other  loans  to  foreign  banks  and 
governments  through  our  non-governmental  institutions 
of  credit  must  certainly  exceed  $200,000,000,  and  may 
be  very  much  more.  Thus,  in  the  three  years 
of  war  this  country,  besides  receiving  home  Total  lending 
its  own  securities  amounting  to  at  least 
$2,200,000,000,  has  also  loaned  to  foreign  countries  not 
less  than  $4,200,000,000.  So  large  a  lending  power  had 
been  unexpected,  and  it  makes  the  question  of  the  source 
of  our  lending  power  of  practical  as  well  as  of  theoretical 
interest.  Our  success,  in  addition,  in  making  war  loans 
of  many  billions  to  our  own  government  belongs  to  an- 
other phase  of  credit. 

We  may,  therefore,  properly  close  our  present  study  at 
this  point  before  the  United  States  has  fairly  entered  the 
European  War. 

1  For  detaUs,  see  Appendix  IV,  D.  "  CJ.  p.  340. 


APPENDIX  I 

GREAT  BRITAIN 

A 

CURRENCY  AND  BANK  NOTES  ACT,  1914 

Ch.  14,  4  AND  5  Geo.  5  [6  August,  1914] 

Be  it  enacted  *  *  * 

1. — (1)  The  Treasury  may,  subject  to  the  provisions  of  this  Act, 
issue  currency  notes  for  one  pound  and  for  ten  shillings,  and  those 
notes  shall  be  current  in  the  United  Kingdom  in  the  same  manner  and 
to  the  same  extent  and  as  fully  as  sovereigns  and  half-sovereigns  are 
current  and  shall  be  legal  tender  in  the  United  Kingdom  for  the  pay- 
ment of  any  amount. 

(2)  [Form  and  design  as  directed  by  the  Treasury.] 

(3)  The  holder  of  a  currency  note  shall  be  entitled  to  obtain  on  de- 
mand, during  oflSce  hours  at  the  Bank  of  England,  payment  for  the 
note  at  its  face  value  in  gold  coin  which  is  for  the  time  being  legal 
tender  in  the  United  Kingdom. 

(4)  The  Treasury  may,  subject  to  such  conditions  as  to  time,  man- 
ner, and  order  of  presentation  as  they  think  fit,  call  in  any  currency 
notes  under  this  Act  on  paying  for  those  notes  at  their  face  value  in 
gold. 

(5)  [Currency  notes  subject  to  forgery,  larceny,  stealing,  and  truck 
acts,  same  as  bank-notes  or  current  coin  of  the  realm.] 

(6)  For  the  purpose  of  meeting  immediate  exigencies  all  postal 
orders  issued  either  before  or  after  the  passing  of  this  Act  shall  tem- 
porarily be  current  and  legal  tender  in  the  United  Kingdom  in  the 
same  manner  and  to  the  same  extent  and  as  fully  as  current  coins, 
and  shall  be  legal  tender  in  the  United  Kingdom  for  the  payment  of 
any  amount.^ 

The  holder  of  any  such  postal  order  shall  be  entitled  to  obtain  on 
demand,  during  office  hours  at  the  Bank  of  England,  payment  for  the 
postal  order  at  its  face  value  in  any  coin  which  is  for  the  time  being 
legal  tender  in  the  United  Kingdom  for  the  amount  of  the  note. 
[Post  Office  Act,  1908,  Section  24  (1)  (b)  and  (c)  do  not  apply.] 
This  subsection  shall  have  effect  only  until  His  Majesty  by  procla- 
mation revokes  the  same,  and  any  proclamation  revoking  this  sub- 

*  Revoked  by  Proclamation,  February  3,  1915. 
363 


364  APPENDIX  I 

section  may  provide  for  the  calling  in  or  exchange  of  any  postal  orders 
affected  thereby. 

2.  Currency  notes  may  be  issued  to  such  persons  and  in  such  manner 
as  the  Treasury  direct,  but  the  amount  of  any  notes  issued  to  any 
person  shall,  by  vartue  of  this  Act  and  without  registration  or  further 
assurance,  be  a  floating  charge  in  priority  to  all  other  charges,  whether 
under  statute  or  otherwise,  on  the  assets  of  that  person. 

3.  The  governor  and  company  of  the  Bank  of  England  and  any 
persons  concerned  in  the  management  of  any  Scottish  or  Irish  bank 
of  issue  may,  so  far  as  temporarily  authorized  by  the  Treasury  and 
subject  to  any  conditions  attached  to  that  authority,  issue  notes  in 
excess  of  any  limit  fixed  by  law;  and  those  persons  are  hereby  indem- 
nified, freed,  and  discharged  from  any  liability,  penal  or  civil,  in  re- 
spect of  any  issue  of  notes  beyond  the  amomit  fixed  by  law  which  has 
been  made  by  them  since  the  first  day  of  August  nineteen  hundred 
and  fourteen  in  pursuance  of  any  authority  of  the  Treasury  or  of  any 
letter  from  the  Chancellor  of  the  Exchequer,  and  any  proceedings 
taken  to  enforce  any  such  liabilit.y  sliall  be  void. 

4.  Any  bank  notes  issued  by  a  bank  of  issue  in  Scotland  or  Ireland 
shall  be  legal  tender  for  a  payment  of  any  amount  in  Scotland  or 
Ireland  respectively,  and  any  such  bank  of  issue  shall  not  be  under 
any  obligation  to  pay  its  notes  on  demand  except  at  the  head  oflSce 
of  the  bank,  and  may  pay  its  notes,  if  thought  fit,  in  currency  notes 
issued  under  this  Act: 

Provided  that  notes  which  are  legal  tender  under  this  section  shall 
not  be  legal  tender  for  any  payment  by  the  head  oflBce  of  the  bank 
by  whom  they  are  issued  for  the  purpose  of  the  payment  of  notes 
issued  by  that  bank. 

This  section  shall  have  effect  only  until  His  Majesty  by  proclama- 
tion revokes  the  same,  and  any  proclamation  revoking  this  section 
may  provide  for  the  calling  in  or  exchange  of  notes  affected  thereby. 

5. — (1)  In  this  Act,  the  expression  "bank  of  issue"  means  any 
bank  having  power  for  the  time  being  to  issue  bank  notes. 

(2)  [Short  title,  as  above.] 

(3)  [Applies  to  Isle  of  Man,  but  not  to  any  other  British  possession.] 

B 

PAPER  ISSUED  BY  THE  TREASURY  ON  AUGUST  27,  1914, 
RELATING  TO  THE  ISSUE  OF  CURRENCY  NOTES 

The  following  are  the  arrangements  made  in  accordance  with  the 
provisions  of  the  Currency  and  Bank  Notes  Act,  1914,  for  placing 
currency  notes  at  the  disposal  of  the  banks  for  meeting  exceptional 
demands. 


APPENDIX  I  365 

(1)  England  and  Wales 

Currency  notes  are  issued  through  the  Bank  of  England  to  bankers 
as  and  when  required  up  to  a  maximum  hmit  not  exceeding,  in  the 
case  of  any  bank,  20  per  cent,  of  its  habUities  on  deposit  and  current 
accounts. 

The  amount  of  notes  issued  to  each  bank  is  treated  as  an  advance 
by  the  Treasury  to  that  bank  bearing  interest  from  day  to  day  at  the 
current  Bank  rate,  the  security  for  the  Treasury  advance  consisting 
of  a  floating  charge  on  the  assets  of  the  bank  up  to  the  amount  of 
the  notes  issued.  The  bank  is  permitted  to  repay  the  whole  or  any 
part  of  any  advance  at  any  time.  Any  amount  repaid  can  be  renewed 
if  and  when  necessity  arises,  pro\'ided  that  the  total  amount  outstand- 
ing at  any  one  time  does  not  exceed  the  authorised  percentage  of  the 
bank's  liabihties. 

Any  sums  received  by  the  Bank  of  England  in  repayment  of  ad- 
vances are  either  applied  forthwith  to  cancelling  any  currency  notes 
which  have  been  returned  from  circulation  and  are  for  the  time  being 
in  the  hands  of  the  Bank  of  England,  or,  in  so  far  as  any  such  sums 
may  exceed  the  amount  of  currency  notes  returned  from  circulation 
in  the  hands  of  the  Bank  of  England  at  the  time  of  receipt,  are  carried 
to  a  separate  account  in  the  books  of  the  Bank  of  England  and  applied 
to  the  cancellation  of  notes  as  and  when  they  return  from  circulation. 

In  order  to  give  the  banks  the  advantage  of  the  credit  allowed  under 
this  arrangement  even  though  actual  currency  may  not  be  required, 
it  is  proposed  by  the  amending  Bill  to  take  power  to  issue  certificates 
in  Ueu  of  actual  notes. 

The  effect  of  the  issue  of  these  certificates  will  be  that  the  banks 
will  be  able  to  obtain  credits  with  the  Bank  of  England  on  the  same 
terms  as  currency  notes  and  the  expense  of  printing  and  handling 
notes  will  be  avoided  except  in  so  far  as  the  notes  may  be  required 
for  actual  circulation. 

(2)  Scotland  and  Ibeland 

The  arrangement  in  England  and  Wales  applies  generally  to  Scot- 
land and  Ireland;  but  in  the  case  of  banks  of  issue  in  Scotland  and 
Ireland  currency  notes,  instead  of  being  issued  to  the  pubhc,  are  used 
as  cover  for  the  banks'  own  notes.  This  arrangement  has  in  practice 
the  effect  of  enabling  the  Scottish  and  Irish  banks  of  issue  to  exceed 
the  normal  limits  of  issue  of  fiduciary  notes  so  long  as  such  excess 
issues  are  covered  by  currency  notes. 

The  new  certificates  will  also  be  available  for  the  purpose  of  cover 
for  these  issues. 

[Provision  for  publication  of  returns  each  Friday.] 


366  APPENDIX  I 


C 

(1)  PROCLAMATION  POSTPONING  PAYMENT  OF  BILLS  OF 
EXCHANGE,  AUGUST  2,  1914 

*  *  *  If  on  the  presentation  for  payment  of  a  bill  of  exchange, 
other  than  a  cheque  or  bill  on  demand,  which  has  been  accepted  before 
the  beginning  of  the  fourth  day  of  August,  nineteen  hundred  and 
fourteen,  the  acceptor  re-accepts  the  bill  by  a  declaration  on  the  face 
of  the  bill  in  the  form  set  out  hereunder,  that  bill  shall,  for  all  pur- 
poses, including  the  liability  of  any  drawer  or  indorser  or  any  party 
thereto,  be  deemed  to  be  due  and  be  payable  on  a  date  one  calendar 
month  after  the  date  of  its  original  maturity,  and  to  be  a  bill  for  the 
original  amount  thereof  increased  by  the  amount  of  interest  thereon 
calculated  from  the  date  of  re-acceptance  to  the  new  date  of  payment 
at  the  Bank  of  England  rate  current  on  the  date  of  the  re-acceptance 
of  the  Bill. 

Form :  Re-accepted  under  Proclamation  for  £ (insert  increased 

sum). 

Signature  

Date  

D 

PAPER  PUBLISHED  BY  THE  TREASURY,  AUGUST  13,  1914, 

REGARDING  THE  DISCOUNT  OF  BILLS  BY  THE 

BANK  OF  ENGLAND 

The  Chancellor  of  the  Exchequer  has  for  several  days  past  been  in 
close  and  constant  consultation  with  the  Governor  of  the  Bank  of 
England,  the  bankers,  the  accepting  houses  and  the  principal  traders 
for  the  purpose  of  providing  the  country  with  all  the  banking  facilities 
it  needs  in  the  present  emergency.  We  are  now  able  to  announce 
that  the  Chancellor  of  the  Exchequer  has  completed  arrangements  with 
the  Bank  of  England  for  terminating  the  present  deadlock  in  the 
money  market,  and  for  enabling  the  trade  and  commerce  of  the  coun- 
try to  resume  its  normal  course.  The  greatest  difficulty  arose  from 
the  stoppage  of  remittances  to  London  both  from  the  provinces  and 
from  other  countries,  not  only  in  Europe,  but  in  all  parts  of  the  world. 
This  caused  a  breakdown  in  the  foreign  exchanges  and  deterred  bank- 
ers from  discounting  bills  in  the  normal  way.  To  overcome  this 
difficulty  as  well  as  that  of  providing  traders  in  this  country  with  all 
the  banking  facilities  they  need,  the  Government  have  now  agreed 
to  guarantee  the  Bank  of  England  from  any  loss  it  may  incur  in  dis- 


APPENDIX  I  367 

counting  bills  of  exchange  either  home  or  foreign,  bank  or  trade, 
accepted  prior  to  August  4,  1914.  Accordingly  we  are  authorized  to 
make  the  following  announcement: — 

"The  Bank  of  England  are  prepared  on  the  application  of  the  holder 
of  any  approved  bill  of  exchange  accepted  before  the  4th  day  of  Au- 
gust, 1914,  to  discount  at  any  time  before  its  due  date  at  Bank  rate 
without  recourse  to  such  holder,  and  upon  its  maturity  the  Bank  of 
England  will,  in  order  to  assist  the  resumption  of  normal  business 
operations,  give  the  acceptor  the  opportunity  until  further  notice  of 
postponing  payment,  interest  being  payable  in  the  meantime  at 
2  per  cent,  over  Bank  rate  varying.  Arrangements  will  be  made  to 
carry  this  scheme  into  effect  so  as  to  preserve  all  existing  obligations. 

"The  Bank  of  England  will  be  prepared  for  this  purpose  to  approve 
such  bills  of  exchange  as  are  customarily  discounted  by  them,  and 
also  good  trade  bills  and  the  acceptances  of  such  foreign  and  colonial 
firms  and  bank  agencies  as  are  established  in  Great  Britain." 

E 

FORMAL   RECORD   OF   ARRANGEMENT   BETWEEN   THE 

TREASURY  AND  THE  BANK  OF  ENGLAND,  DATED 

AUGUST  27,  1914,  EXPANDING  D 

1.  The  Bank  of  England  will,  upon  the  application  of  the  holder  of 
any  approved  bill  of  exchange  before  August  4,  1914,  discount  such 
bill  at  any  time  before  its  due  date  at  Bank  rate  without  recourse  to 
such  holder. 

(In  the  case  of  date  bills,  the  acceptance,  if  undated,  may  be  deemed 
to  have  been  given  in  course  of  post  from  the  date  on  which  the  bills 
were  drawn.) 

2.  It  will  be  for  the  Bank  of  England  to  decide  in  any  particular 
case  whether  a  bill  is  to  be  approved,  but  the  Bank  will  be  prepared 
to  approve  such  bills  of  exchange  as  are  customarily  discounted  by 
them,  and  also  good  trade  bills  and  the  acceptances  of  such  foreign 
and  colonial  firms  and  bank  agencies  as  are  established  in  Great 
Britain. 

3.  Upon  the  maturity  of  any  bill  so  discounted  the  Bank  of  Eng- 
land will  give  the  acceptor  the  opportunity  of  postponing  payment 
pending  further  notice,  interest  being  payable  in  the  meantime  at  2 
per  cent,  over  Bank  rate  varying. 

4.  The  date  at  which  such  further  notice  shall  be  given  shall  be  de- 
termined by  the  Bank  after  consultation  with  the  Treasury. 

5.  Arrangements  will  be  made  for  preserving  all  existing  obligations, 
so  far  as  possible,  in  respect  of  bills  discounted. 


368 


APPENDIX  I 


6.  The  Bank  of  England  are  to  be  indemnified  for  any  action  taken 
by  them  in  the  matter,  and  to  be  guaranteed  by  the  Treasury  against 
any  loss  which  may  be  incurred  by  the  Bank  as  the  result  of  their 
operations. 

7.  Such  loss  is  to  be  calculated  in  accordance  with  an  account  to 
be  kept  in  the  following  form: — 


Amount  of  approved  bills  dis- 
counted at  Bank  rate,  pay- 
ment of  which  has  been  post- 
poned   

Net  deficiency 


Amount  realized  by  the  Bank  in 
respect  of  approved  bills,  pay- 
ment of  which  has  been  post- 
poned   

Interest  received  at  2  per  cent, 
(above  bank  rate  carrying)  in 
respect  of  approved  bills,  pay- 
ment of  which  has  been  post- 
poned, less  allowance  to  the 
Bank  for  interest  (at  1  per 
cent,  below  Bank  rate  vary- 
ing) and  expenses  (one-half 
percent.) 


8.  The  Chancellor  of  the  Exchequer  has  undertaken  to  ask  Parlia- 
ment to  pass  the  legislation  necessary  for  giving  statutory  authority 
for  this  scheme,  and  for  charging  against  the  Exchequer  the  amount 
of  the  ultimate  loss  which  may  be  incurred  by  the  Bank  in  carrying 
it  into  effect. 


APPENDIX  II 

FRANCE 


FRENCH  LAW  OF  AUGUST  5,  1914,  SUSPENDING  SPECIE 

PAYMENTS 

Art.  1.  The  amount  of  note-issues  by  the  Bank  of  France  and  its 
branches,  fixed  at  the  maximum  of  six  milliards  eight  hundred  millions 
(6,800,000,000)  (law  of  December  29,  1911)  is  raised  provisionally  to 
twelve  milliards.  It  will  be  possible  to  pass  this  limit  by  a  decree 
made  by  the  Conseil  d'Etat  on  a  proposal  from  the  Minister  of  Finance. 

Art.  2.  [The  limit  of  the  Bank  of  Algeria  was  also  raised  from 
300,000,000  to  400,000,000,  and  denominations  of  5  francs  were 
authorized.] 

Art.  3.  Until  otherwise  ordered  by  law,  the  Bank  of  France  and 
the  Bank  of  Algeria  are  relieved  from  the  obligation  to  redeem  their 
notes  in  specie. 

Art.  4.  [Approves  agreements  made  between  the  Minister  of  Fi- 
nance and  the  Governor  of  the  Bank  of  France,  and  the  Director 
General  of  the  Bank  of  Algeria.] 


Suspension  of  specie  payments  by  colonial  banks  was  authorized 
on  August  4,  1914.  See  Dalloz:  Guerre  de  1914.  Documents  officiels, 
vol.  I,  from  which  the  French  laws  and  decrees  were  taken. 

B 
MORATORIUM 

On  July  29,  1914,  the  first  moratorium  was  decreed.  The  maturity 
of  obligations  entered  into  before  August  1,  1914,  and  falling  due  after 
that  date  or  before  August  15,  1914,  was  postponed  30  days. 

On  August  2,  1914,  the  above  decree  was  applied  to  deposits  in 
banks  and  institutions  of  credit:  if  less  than  250  francs,  the  whole  could 
be  drawn;  if  more  than  that  sum,  only  5  per  cent  of  the  excess,  in 
addition  to  250  francs;  commercial  or  industrial  employers  of  labor 
could  draw  the  whole  for  wages;  and  the  decree  was  applied  to  sav- 
ings and  insurance  contracts. 

These  two  early  decrees  were  completed  by  that  of  August  9,  1914, 
which  follows: 


370  APPENDIX  H 


DECREE  OF  AUGUST  9,  1914 

Art.  1.  For  all  negotiable  instruments  falling  due  after  July  31, 
1914,  inclusively,  or  maturing  before  September  1,  1914,  the  date  of 
payment  is  delayed  thirty  days,  on  condition  that  they  were  under- 
written previous  to  August  4,  1914. 

The  negotiable  instruments  in  the  view  of  the  present  article  are: 
bills  of  exchange;  notes  to  order,  or  to  bearer;  checks,  with  the  ex- 
ception of  those  presented  by  the  drawer  himself;  orders  and  warrants. 

Not  falhng  under  the  application  of  the  present  article  are  negotia- 
ble instruments  issued  upon  the  public  Treasury. 

Art.  2.  [Applies  to  commitments  for  merchandise  entered  into 
before  August  4,  1914.] 

Art.  3.     [Applies  likewise  to  advances  on  movables.] 

Art.  4.  [Applies  to  demands  for  deposits,  except  up  to  250  francs, 
plus  5  per  cent,  etc.;  not  to  demands  for  paying  labor;  not  to  those 
whose  establishments  have  been  requisitioned,  etc.] 

Art.  5.  The  postponement  of  thirty  days  dating  from  August  1, 
1914,  is  applicable  to  the  redemption  of  obligations  or  contracts  of 
insurance,  of  capitalisation  or  savings  for  fixed  terms,  or  those  stipu- 
lated to  be  redeemable  at  the  will  of  the  owner  or  bearer. 

On  August  10,  1914,  all  prescriptions  and  limitations,  civil,  commer- 
cial, or  administrative  were  suspended  until  the  end  of  the  war.  They 
were  further  treated  by  the  decree  of  December  16,  1914,  and  modified 
by  that  of  May  12,  1915. 

The  main  moratorium  of  August  9  was  given  more  in  detail  on 
August  29,  1914,  and  extended  until  October  1,  1914.  On  the  same 
day,  a  decree  suspended  payments  on  obligations  of  departments, 
communes,  etc.,  until  the  end  of  the  war. 

From  time  to  time  the  moratorium  was  extended  by  many  decrees 
as  follows: 


September  27,  1914,  30  days  to  November  1 

October       27,  1914,  60  days  to  January  1 

December  15,  1914,  60  days  to  March  1 

February    25,  1915,  60  days  to  May  1 

April  15,  1915,  90  days  to  August  1 

June  24,  1915,  90  days  to  November  1 

October       16,  1915,  60  days  to  January  1 

December  2.3,  1915,  90  days  to  April  1 

March         18,  1916,  90  days  to  July  1 

June  24,  1916,  90  days  to  October  1 

September  20,  1916,  90  days  to  January  1 


1914 
1915 
1915 
1915 
1915 
1915 
1916 
1916 
1916 
1916 
1917 


Out  of  a  total  of  4,480  million  francs  in  August,  1914,  postponed  at 
the  Bank  of  France  (from  which  should  be  deducted  800  millions  for 


APPENDIX  II  371 

those  under  the  colors  or  in  territory  occupied  by  the  enemy)  the 
amount  remaining  December  14,  1916,  was  only  1,346  millions.  Suc- 
cessful efforts  had  been  made  to  have  postponed  debts  paid  up,  and 
in  December,  1916,  practically  no  delay  was  gr9,nted  unless  good 
cause  could  be  shown  to  a  magistrate.  Thereafter  moratorium  decrees 
ceased. 


DECREE  OF  SEPTEMBER  27,  1914,  CONCERNING  TRANS- 
ACTIONS IN  SECURITIES 

Art.  1.  Provisionally  suspended  are  all  demands  for  payment  and 
all  judicial  actions  relative  to  the  sale  and  purchase  in  the  period 
previous  to  August  4, 1914,  of  rentes,  public  securities,  and  other  trans- 
ferable instruments,  as  well  as  the  dealings  for  carrying  them  forward. 

The  sums  due  by  reason  of  these  sales,  purchases,  and  carrying 
charges  should  be  increased  by  interest  for  the  time  of  postponement 
at  the  rate  of  5  per  cent,  per  annum. 


This  decree  was  modified  by  that  of  September  14,  1915,  which 
brought  pressure  on  all  not  under  the  colors  or  in  occupied  territory 
to  make  payment  of  10  per  cent,  of  differences  due  in  settlements,  and 
6  per  cent,  on  delayed  payments. 

On  July  3,  1915,  the  sending  out,  or  reexportation  under  any  cus- 
toms rule,  of  gold  in  bullion,  ingots,  bars,  powder,  articles,  or  coin 
was  forbidden  by  decree.  This  prohibition,  however,  did  not  apply 
to  exportations  by  the  Bank  of  France. 

August  26,  1915,  silver  coins  were  included. 


APPENDIX  III 

GERMANY 

A 

GERMAN  BANK  ACT,  MARCH  14,  1875^ 

Title  I — General  Directions 

§  1.  The  right  of  issuing  notes  can  be  conferred  only  by  an  Act 
of  the  Empire;  nor  can  any  issues  be  extended  beyond  the  amount 
fixed  by  the  present  Act  except  by  a  similar  Act.  To  the  bank-notes 
issued  according  to  this  Act  are  assimilated  the  State  paper  notes 
which  have  been  transferred  to  a  bank  with  a  view  to  increase  its 
working  capital. 

§  2,  No  one  can  be  forced  to  accept  bank-notes  tendered  for  pay- 
ments which  by  law  must  be  paid  in  money;  nor  can  the  offices  of  the 
Empire  be  obliged  by  virtue  of  any  law  of  a  State  [Landesgesetz]  to  re- 
ceive bank-notes  in  payment. 

§  3.  Bank-notes  are  to  be  issued  only  in  denominations  of  100, 
200,  500  and  1000  marks,  or  in  multiples  of  1000  marks. 

§  4.  Every  bank  is  bound  to  redeem  its  notes  on  presentation  at 
their  full  nominal  value.  Banks  are  also  bound  to  accept  their  notes 
at  their  full  nominal  value  in  payments,  and  that  not  only  at  the 
central  establishment,  but  at  all  the  branch  offices.  [Must  redeem 
mutilated  notes.] 

§  5.     [Soiled  or  damaged  notes  not  to  be  reissued.] 

§  6.  The  calling  in  and  withdrawal  of  the  notes  of  a  bank,  or  of 
any  kind  of  bank-notes,  can  only  take  place  with  the  special  permis- 
sion, or  by  order,  of  the  Federal  Council.  [Order  granted  in  case  of 
soiled  notes,  loss  of  right  to  issue,  and  for  series.  Council  to  prescribe 
notices  and  regulations  for  the  security  of  note- holders.] 

^  The  German  text  is  given  by  Bezold,  Gesetzgebung  des  Deutschen  Reichs,  1, 
Theil  I,  pp.  255-381.  A  translation  in  English  by  E.  Seyd  was  published  in 
the  Journal  of  the  Statistical  Society,  1875,  pp.  267-279;  and  later  another  was 
printed  in  U.  S.  National  Monetary  Commission  (1910),  No.  574,  pp.  128-134. 
The  last  document  also  reprints  the  statute  of  May  21,  1875,  the  law  of  Jime  7, 
1899,  and  the  law  of  June  1.  1909. 

In  view  of  the  difficulty  of  access  by  most  readers  to  the  sets  of  documents 
above  mentioned,  it  was  thought  worth  while  to  present  herewith  the  original 
Bank  Act,  so  that  the  relation  of  recent  war  legislation  to  it  might  be  con- 
veniently studied. 

372 


APPENDIX  III  373 

§  7.  No  bank  issuing  notes  has  power — (1)  to  accept  bills  of  ex- 
change; (2)  to  buy  or  sell  on  time,  either  for  its  own  account  or  for 
accoimt  of  others,  merchandise  or  negotiable  securities,  or  undertake 
to  guarantee  the  fulfilment  of  such  transactions. 

§  8.  Banks  issuing  notes  are  obliged  to  publish  in  the  Reichsanzeiger 
at  their  own  expense:  (1)  a  statement  of  their  assets  and  liabilities  on 
the  7th,  loth,  23rd  and  last  day  of  each  month,  not  later  than  the 
fifth  day  following  these  dates.  (2)  An  exact  balance  sheet  of  assets 
and  liabiHties,  as  well  as  the  profit  and  loss  account  of  the  year,  to 
be  pubhshed  not  later  than  three  months  after  the  close  of  their  busi- 
ness year.  The  weekly  publication  must  specify  the  following 
amounts:  1)  Under  the  head  of  habilities:  the  subscribed  capital; 
the  surplus;  notes  in  circulation;  other  demand  liabilities;  liabilities 
at  notice;  remaining  liabilities.  2)  Under  the  head  of  assets:  the 
stock  of  coin  and  bullion  {i.  e.,  German  current  coins,  gold  in  bars  or 
foreign  coin,  at  the  rate  of  1392  marks  to  the  pound  fine);  Imperial 
Treasury  notes  [Reichskassenscheine];  notes  of  other  banks;  bills  of 
exchange;  Lombard  advances  [i.  e.,  advances  on  pledges];  securities; 
remaining  assets.  The  Federal  Council  will  decide  which  part  of  the 
assets  and  liabilities  in  the  yearly  balance  sheet  are  to  be  specially 
shown.  Both  returns  must  specify  the  contingent  liabihties  upon 
inland  bills  of  exchange  which  have  passed  into  other  hands. 

§  9.  Banks  whose  note  circulation  exceeds  the  amount  of  their 
cash,  and  the  amount  assigned  to  them  in  the  subjoined  list,^  must 
after  January  1,  1876,  pay  yearly  to  the  Imperial  Treasury  on  the 
excess  a  tax  of  5  per  cent.  In  calculating  the  tax  the  following  items 
are  to  be  reckoned  as  cash:  Current  German  money .^  Imperial  Treasury 
notes  [Reichskassenscheine],  notes  of  other  German  banks,  and  gold 
bars  or  foreign  gold  coins  calculated  at  the  rate  of  1392  marks  to  the 
pound.  If  a  bank  lose  the  right  of  issuing  notes  (§  49),  its  share  in 
the  right  of  issue  of  uncovered  notes  not  subject  to  taxation  falls  to 
the  Reichsbank. 

§  10.  For  the  piu-pose  of  computing  the  amoiuit  of  the  tax,  the 
administration  of  the  bank  has  to  make  out  a  statement  on  the  7th, 
15th,  23rd,  and  the  last  day  of  each  month  of  the  cash  and  notes  out- 
standing of  the  bank,  and  submit  this  statement  to  the  Imperial 
Chancellor.  At  the  close  of  every  year  the  controlling  authorities  will, 
upon  the  basis  of  these  statements,  fix  the  amount  of  tax  to  be  paid 
by  each  bank,  as  follows :  -^  per  cent,  of  the  surplus  of  luicovered 
notes  subject  to  the  tax,  as  fixed  in  each  of  the  different  statements, 
is  to  be  calculated  as  part  of  the  tax;  and  the  total  of  these  separate 

'  Cf.  U.  S.  National  Monetary  Commission,  No.  574,  p.  91. 
2  By  Act  of  June  1,  1909,  "German  money"  was  changed  to  "German  gold 
coins." 


374  APPENDIX   III 

tax  debits  is  the  amount  of  tax  wliich  the  bank  has  to  pay  to  the 
Imperial  Treasury  at  the  latest  on  the  31st  of  January  of  the  year  fol- 
lowing. 

§  11.  [Foreign  bank-notes  or  obligations  issued  to  bearer  are  not 
acceptable  means  of  payment,  even  if  issued,  either  exclusively  or 
along  with  another  valuation,  in  the  currency  of  the  Empire  or  a  Ger- 
man State.] 

Title  II — Reichsbank 

§  12.  Under  the  control  and  direction  of  the  Empire,  a  bank  will 
be  established,  bearing  the  name  of  "Reichsbank,"  which  possesses 
the  quality  of  a  legal  'persona,  and  has  the  function  of  regulating  the 
monetary  circulation  in  the  whole  of  the  German  Empire,  facilitating 
the  settlement  of  payments,  and  putting  available  capital  into  effective 
use.  The  Reichsbank  has  its  head  office  in  Berlin.  It  is  authorized 
to  establish  branches  in  any  place  in  the  Empire.  The  Federal  Coun- 
cil may  order  the  establishment  of  such  branches  in  designated  places. 

§  13.  The  Reichsbank  is  empowered  to  transact  the  following  kinds 
of  business: 

1.  To  buy  and  sell  gold  and  silver  coin  and  bullion. 

2.  To  discount,  buy,  and  sell  bills  of  exchange,  whose  maturity 
does  not  exceed  three  months,  and  which  are  guaranteed  usually  by 
three,  but  at  least  by  two,  solvent  persons;  also  obligations  of  the 
Empire,  of  any  German  State,  or  domestic  municipal  corporations, 
which  are  redeemable  at  their  face  value  at  the  latest  in  three  months. 

3.  To  make  loans  bearing  interest  for  not  longer  than  three  months 
against  the  pledge  of  transferable  property  (Lombards),  as  follows: 

a)  Gold  and  silver,  coined  or  uncoined; 

6)  Obligations  of  the  Empire,  of  a  German  State,  or  of  a  domestic 
municipal  corporation,  payable  to  bearer,  which  bear  interest  or  fall 
due  at  the  latest  within  a  year;  or  obligations  bearing  interest,  payable 
to  bearer,  whose  interest  is  guaranteed  by  the  Empire  or  a  German 
State;  fully  paid  shares,  preference  shares,  prior-lien  bonds,  of  German 
railway  companies  whose  lines  are  in  active  operation ;  mortgage  bonds 
of  German  joint-stock  banks  or  cooperative  mortgage  banks,  standing 
under  the  control  of  provincial,  municipal,  or  any  other  State  author- 
ity, at  a  valuation  of  not  over  three-fourths  of  their  market  worth ; 

c)  Foreign  obligations,  bearing  interest,  payable  to  bearer,  and 
foreign  prior-lien  railway  obligations  having  a  State  guaranty,  at  not 
over  50  per  cent,  of  their  market  value; 

d)  Bills  of  exchange,  endorsed  by  persons  of  recognized  standing,  at 
a  margin  of  at  least  5  per  cent,  below  their  market  value; 

e)  Pledges  of  merchandise  stored  within  the  country,  at  not  over 
two-thirds  of  their  value. 


APPENDIX  III  375 

4.  To  buy  and  sell  securities  under  the  conditions  stated  in  3,  b). 
The  instructions  of  the  Directorium  of  the  Reichsbank  (§  26)  to  deter- 
mine what  proportion  of  the  working  capital  shall  be  invested  in  such 
securities. 

5.  To  collect  funds  for  the  account  of  private  persons,  establish- 
ments, or  officials;  to  make  payments  upon  funds  in  hand;  and  to 
provide  checks  or  drafts  on  their  branches  or  correspondents. 

6.  To  buy  for  outside  account  securities  of  any  kind,  or  the  precious 
metals,  from  funds  in  hand,  and  to  sell  them  on  due  delivery. 

7.  To  accept  money,  yielding  interest  or  not,  on  account  of  de- 
posits, or  for  transfer  account  [Giroverkehr],  the  total  interest-bearing 
deposits  not  to  exceed  the  capital  and  surplus  of  the  bank. 

8.  To  accept  the  charge  and  management  of  valuable  goods. 

§  14.  The  Reichsbank  is  obliged  to  exchange  its  notes  for  gold 
bullion  at  the  fixed  rate  of  1392  marks  for  a  pound  fine.  The  bank 
is  entitled  to  have  such  gold  essayed  by  experts  appointed  by  itself  at 
the  expense  of  the  one  presenting  it. 

§  15.  The  Reichsbank  must  publish  the  rate  at  which  it  discounts 
(§  13.  2)  or  makes  an  advance  on  interest  (§  13.  3).  [Returns  for  each 
week  are  based  on  the  records  of  the  bank  and  its  branches.] 

§  16.  The  Reichsbank  has  the  right  to  issue  bank-notes  according 
to  the  needs  of  its  business.  [Fabrication,  emission,  withdrawal  and 
destruction  of  notes  are  under  the  Imperial  Debt  Commission  of  the 
Empire.] 

§  17.  The  Reichsbank  is  obliged  to  hold  in  its  vaults  as  cover  at 
least  one-third  of  the  amount  of  its  notes  outstanding  in  current  Ger- 
man money.  Imperial  Treasury  notes  [Reichskassenscheine],  gold  bars 
or  foreign  coins,  reckoned  at  1392  marks  to  the  pound;  and  to  hold 
as  cover  for  the  rest  discounted  bills  of  exchange  which  have  a  ma- 
turity of  not  over  three  months,  and  for  which  as  a  rule  three,  or  at 
the  least  two,  persons  of  known  solvency  are  guarantors. 

§  18.  The  Reichsbank  is  obliged  to  redeem  its  notes  on  presenta- 
tion in  current  German  money  to  bearer  (a)  at  its  head  ofiice  in  Ber- 
lin; (b)  at  its  branches,  so  far  as  its  means  and  the  need  of  money 
permit. 

§  19.  The  Reichsbank  is  obliged  to  receive  in  payments  at  their 
full  face  value  the  notes  of  the  banks  designated  by  the  Imperial  Chan- 
cellor, according  to  the  instructions  in  §  45  of  this  Act,  not  only  in 
Berlin,  but  also  at  its  branches  in  cities  having  more  than  80,000 
inhabitants,  or  at  the  site  of  the  bank  which  has  issued  the  notes,  so 
long  as  the  issuing  bank  strictly  observes  the  rules  for  the  redemption 
of  its  notes.  The  bank-notes  thus  received  must  either  be  presented 
for  redemption,  or  in  payments  to  the  bank  itself,  or  used  for  pay- 
ments in  the  place  where  the  bank  has  its  head  oflBce. 


376  APPENDIX  III 

The  Reichsbank  is  empowered  to  make  agreements  with  other 
German  banks  regarding  the  renouncing  of  their  right  to  issue  notes. 

§  20.  If  the  debtor  on  a  Lombard  loan  (§  13.  3)  should  default,  the 
Reichsbank  is  authorized,  without  an  order  of  the  Court,  to  sell  pub- 
licly the  collateral  through  one  of  its  officials  or  through  an  official 
duly  qualified  as  an  auctioneer;  or  should  the  collateral  be  quoted  on 
the  Bourse  or  market,  the  sale  may  be  made  privately  through  an 
official,  or  a  broker,  or,  in  the  lack  of  the  latter,  by  a  duly  qualified 
auctioneer,  at  the  ruling  price;  and  from  the  proceeds  to  reimburse 
itself  for  the  principal,  interest  and  expenses.  The  bank  retains  this 
right  also  prior  to  other  claimants  and  upon  all  the  assets  of  the  debtor. 

§  21.  The  Reichsbank  and  its  branches  throughout  the  Empire 
are  exempt  from  duties  and  income  taxes. 

§  22.  The  Reichsbank  is  obliged,  free  of  charge,  to  receive  pay- 
ments for  the  account  of  the  Empire,  and  to  make  payments  to  the 
full  extent  of  the  funds  of  the  Empire.  It  is  empowered  to  undertake 
the  same  business  for  the  German  States. 

§  23.  The  capital^  of  the  Reichsbank  consists  of  120  million  marks, 
divided  into  40,000  shares  of  3,000  marks  each,  registered  in  the  names 
of  the  owners.  The  shareholders  are  not  held  personally  liable  for 
the  liabilities  of  the  Reichsbank. 

§  24.  The  net  earnings  of  the  Reichsbank  at  the  end  of  the  year 
are  to  be  thus  disposed  of: 

1.  First,  a  regular  dividend  to  the  shareholders  of  4J^  percent.^ 
reckoned  on  the  capital. 

2.  From  the  residue  a  sum  of  20  per  cent,  to  be  carried  to  the  re- 
serve fund  [surplus]  until  it  has  reached  one-fourth  of  the  capital. 

3.  Of  any  remaining  balance  one-half  is  to  be  paid  to  the  Imperial 
Treasury,  and  one-half  to  the  shareholders,  provided  the  total  divi- 
dend to  the  shareholder  does  not  exceed  8  per  cent.  From  any  re- 
mainder the  shareholders  receive  one-quarter,  the  Imperial  Treasury 
three-quarters.  Should  the  net  earnings  not  amount  to  4  3^  per  cent, 
of  the  capital,  the  deficiency  is  to  be  made  up  from  the  surplus. 

If  the  shares  of  the  Reichsbank  are  issued  at  a  premium,  the  gain 
goes  to  the  surplus. 

Postponed  dividends,  after  running  four  years,  dating  from  the 
day  of  maturity,  become  outlawed  in  favor  of  the  bank. 

§  25.  The  control  over  the  Reichsbank  vested  in  the  Empire  will 
be  exercised  by  a  Bank-Kuratorium,  which  consists  of  the  Imperial 
Chancellor  as  chairman,  and  four  members.  One  of  these  members 
is  named  by  the  Emperor,  the  three  others  by  the  Federal  Council. 

'  By  the  Statute  of  May  21,  1875,  and  by  the  Act  of  June  7,  1899,  an  addi- 
tional capital  of  60,000,000  marks  was  added. 

^  By  the  Act  of  June  7,  1899,  the  regular  dividend  was  changed  to  3}^  per 
cent. 


APPENDIX  III  377 

The  Kuratorium  meets  once  a  quarter.  At  these  meetings  a  report 
upon  the  condition  of  the  bank  and  all  matters  relating  thereto,  and 
a  general  statement  of  the  accounts  of  all  operations  of  the  bank  and 
the  regulations  pertaining  thereto,  shall  be  submitted. 

§  26.  The  direction  of  the  bank  vested  in  the  Empire  will  be  ex- 
ercised by  the  Imperial  Chancellor,  and  under  him  by  the  Directorium 
of  the  Reichsbank;  in  case  the  Imperial  Chancellor  is  prevented  from 
exercising  this  duty,  the  direction  will  be  taken  over  by  a  substitute 
named  by  the  Emperor. 

The  Imperial  Chancellor  directs  the  whole  administration  of  the 
bank  in  accordance  with  the  provisions  of  this  Act  and  of  those  to  be 
announced  thereunder  (§  40).  He  publishes  the  regulations  for  the 
conduct  of  business  by  the  Directorium  and  the  branches,  as  well  as 
the  instructions  for  the  officials  of  the  bank;  and  he  is  empowered  to 
make  any  desired  changes  in  existing  regulations  and  instructions. 

§  27.  The  Directorium  is  the  administrative  and  executive  author- 
ity by  which  the  Reichsbank  is  officially  represented.  It  consists  of 
a  president  and  a  certain  number  of  members,  it  reaches  its  decisions 
by  a  majority  vote,  and  in  its  administration  it  is  entirely  subject  to 
the  instructions  and  directions  of  the  Imperial  Chancellor.  The 
president  and  members  of  the  Directorium  of  the  Reichsbank  are 
appointed  for  hfe  by  the  Kaiser  on  the  nomination  of  the  Federal 
Council. 

§  28.  [Officials  of  the  bank  are  imperial  functionaries;  salaries, 
pensions,  etc.,  to  be  borne  by  the  bank;  salaries,  etc.,  of  the  Direc- 
torium are  fixed  by  the  yearly  imperial  budget;  of  others  by  the 
Emperbr,  with  the  agreement  of  the  Federal  Council,  on  the  advice 
of  the  Chancellor.     No  official  to  hold  shares.] 

§  29.  [Accounts  are  submitted  to  the  Court  of  Accounts,  or  Reck- 
nungshof,  of  the  empire;  their  form  to  be  determined  by  the  Chan- 
cellor, but  the  Court  of  Accoimts  to  be  consulted  as  to  the  directions 
therefor.] 

§  30.  The  shareholders  have  a  share  in  the  administration  of  the 
Reichsbank  through  a  general  assembly,  acting  through  a  standing 
committee  (Centralausschuss)  chosen  out  of  their  number,  and  in 
accordance  with  the  following  rules: 

§  31.  The  Centralausschuss  is  the  permanent  representative  of  the 
shareholders  in  matters  of  administration.  It  consists  of  fifteen  mem- 
bers, and  in  addition  fifteen  alternates  are  chosen.  The  members  and 
alternates  should  be  elected  from  the  list  of  those  shareholders  hold- 
ing at  least  three  shares  in  their  name.  All  members  and  alternates 
must  be  resident  within  the  Empire,  and  at  least  nine  members  and 
nine  alternates  in  Berlin.  One-third  of  the  members  retire  annually, 
but  are  eligible  for  re-election. 


378  APPENDIX  III 

The  Centralausschuss  meets  under  the  chairmanship  of  the  president 
of  the  Directorium  at  least  once  a  month,  and  extraordinary  meetings 
can  be  called.  The  quorum  consists  of  seven  members;  the  instruc- 
tions will  determine  in  what  cases  and  in  what  order  the  alternates 
are  to  be  called. 

§  32.  To  the  Centralausschuss  will  be  submitted  each  month  the 
weekly  statements  on  the  condition  of  discounts,  bills  of  exchange, 
Lombards;  of  the  note  circulation,  cash  reserves,  deposits;  purchase 
and  sale  of  gold,  bills,  and  securities;  the  distribution  of  funds  to  the 
branches;  the  results  of  the  regular  and  special  examinations  of  the 
cash;  as  well  as  the  views  and  proposals  of  the  Directorium  concerning 
the  course  of  business  in  general  and  any  needful  regulations. 

The  Centralausschuss  is  especially  asked  to  give  its  opinion  on  the 
following: 

a)  The  balance  and  earnings,  which  wall  be  drawn  up  at  the  end 
of  the  business  year  by  the  Directorium.  to  be  laid  with  their  opinion 
before  the  Chancellor  for  his  final  approval,  and  then  to  the  share- 
holders in  their  regular  assembly. 

b)  [Changes  in  salaries  and  pensions  (§  28).] 

c)  The  filling  of  vacancies  in  the  Directorium,  with  the  exception  of 
president,  before  the  final  decision  by  the  Federal  Council  (§  27). 

d)  The  maximum  of  funds  to  be  loaned  on  Lombards, 

The  purchase  of  securities  for  the  account  of  the  bank  can  be  ac- 
commodated to  the  maximum  of  the  bank's  funds  to  be  employed 
for  this  purpose  only  with  the  approval  of  the  Centralausschuss. 

e)  The  rate  of  discount,  and  that  on  Lombards,  together  with  pos- 
sible changes  in  the  principles  and  maturities  of  credit  operations. 

/)  Arrangements  with  other  German  banks  (§  19)  and  the  princi- 
ples to  be  followed  in  these  relations.  General  business  regulations 
and  instructions  to  officials  are  to  be  communicated  to  the  Central- 
ausschuss as  soon  as  they  are  published  (§  26). 

§  33.     The  members  of  the  Centralausschuss  draw  no  salary. 

If  a  member  of  the  Assembly  [Ausschuss]  betrays  a  bank  secret 
(§  39)  which  has  come  to  him  in  his  official  position,  or  has  in  any 
other  way  lost  public  confidence,  or  if  through  him  the  interest  of  the 
institution  is  endangered,  the  general  assembly  is  empowered  to  sever 
his  connection  with  it. 

A  member  of  the  Assembly  who  has  become  bankrupt,  who  has 
been  absent  from  meetings  for  a  half-year,  or  has  lost  his  eligibility 
(§  31)  is  to  be  regarded  as  no  longer  a  member. 

§  34.  The  permanent  special  control  over  the  management  of  the 
Reichsbank  is  to  be  exercised  by  three  deputies,  chosen  by  the  Cen- 
tralausschuss from  the  list  of  its  own  members  for  one  year,  for  whom 
respectively  three  alternates  shall  likewise  be  chosen.     The  business 


APPENDIX  III  379 

regulations  shall  state  in  what  cases  and  in  what  order  the  alternates 
shall  be  called. 

The  deputies  are  given  the  special  right  to  attend  all  the  meetings 
of  the  Directorium  and  join  in  the  discussions. 

They  are  further  empowered  and  obliged,  in  the  customary  hours 
of  business  and  in  company  with  a  member  of  the  Directorium,  to 
make  themselves  acquainted  with  the  course  of  business,  to  inspect  the 
books  and  the  portfolios  of  the  bank,  and  to  be  present  at  the  regular 
and  special  examinations  of  the  bank.  As  to  their  findings  they  are 
to  report  at  the  monthly  meeting  of  the  Centralausschuss. 

A  deputy  may  be  suspended  by  the  Centralausschuss  under  §  33, 
paragraph  2,  without  waiting  for  the  action  of  the  general  assembly. 

§  35.  Dealings  with  the  Finance  Administration  of  the  Empire  or 
of  the  German  States  must  be  carried  on  only  within  the  restrictions 
of  this  Act  and  the  Bank  Statutes,  and,  if  any  transactions  should  not 
fall  under  the  general  nature  of  the  bank's  operations,  they  must  be 
brought  to  the  attention  of  the  deputies,  and,  if  only  one  of  them 
objects,  they  must  be  laid  before  the  Centralausschuss.  If  the  latter 
in  a  definitive  meeting  does  not  accept  them  as  permissible  by  a 
majority  vote,  the  dealings  cannot  be  carried  through. 

§  36.  Besides  the  location  of  the  head  office  of  the  bank,  the  Fed- 
eral Council  is  to  determine  the  larger  places  where  the  chief  offices 
of  the  Reichsbank  are  to  be  established,  which  come  under  the  con- 
trol of  a  management  consisting  of  at  least  two  members,  subordinate 
to  a  Bank  Commissioner  appointed  by  the  Emperor. 

For  each  chief  office  of  the  Reichsbank,  where  there  are  a  sufficient 
number  of  shareholders,  there  should  be  a  district  [Bezirk]  committee 
whose  members  are  chosen  by  the  Imperial  Chancellor  from  a  fist  of 
shareholders  furnished  by  the  Bank  Commissioner  and  the  Centralaus- 
schuss, and  whose  residence  must  be  in  the  place  of  the  chief  office  or 
in  its  immediate  neighborhood,  To  this  committee  will  be  com- 
municated at  its  regular  monthly  meetings  the  reports  on  the  business 
of  the  chief  offices  of  the  bank  and  the  general  regulations  issued  by 
the  central  administration.  Proposals  or  motions  of  the  district  com- 
mittee which  are  not  approved  by  the  management  are  to  be  presented 
by  the  latter  to  the  Chancellor  in  a  report. 

The  permanent  special  control  over  the  business  of  the  chief  offices 
of  the  bank,  according  to  the  regulations  in  §  34,  so  far  as  it  does  not 
interfere  with  the  daily  course  of  business,  is  to  be  exercised  by  two 
or  three  deputies,  chosen  from  its  own  membership  by  the  district 
committee;  or,  if  there  is  no  district  committee,  one  is  to  be  appointed 
by  the  Chancellor  according  to  paragraph  2. 

§  37.  The  establishment  of  branches  [Reichshankstellen]  elsewhere, 
if  they  are  directly  under  the  control  of  the  Directorium,  is  in  the 


380  APPENDIX  III 

hands  of  the  Chancellor;  if  they  are  under  the  control  of  another 
branch  [Zweiganstalt],  in  the  hands  of  the  Directorium. 

§  38.  [The  bank  is  responsible  for  the  signatures  of  those  acting 
for  the  bank,  even  if  specially  authorized;  they  are  made  by  two  mem- 
bers of  the  Directorium.  Suits  must  be  brought  against  any  one  of 
the  offices  of  the  bank  in  the  place  where  it  is  situated.] 

§  39.  Every  official  in  the  administration  of  the  bank,  member  of 
a  committee,  or  deputy,  are  obliged  to  keep  silence  regarding  any 
individual  transaction  of  the  bank,  especially  that  with  private  persons 
and  the  credit  awarded  to  them.  Deputies  of  the  Centralausschuss 
and  their  alternates,  as  well  as  the  officials  of  the  chief  offices  of  the 
Reichsbank,  before  entering  on  their  duties,  must  bind  themselves  to 
this  observance  by  a  clasp  of  the  hand  instead  of  an  oath. 

§  40.  [The  statutes,  according  to  §§  12-39,  should  be  published, 
concerning  technical  details  of  shares,  coupons,  transfers,  cancellation, 
dividends,  yearly  balance-sheet,  meetings,  voting  (no  one  person 
having  over  100  votes),  elections  of  committees,  public  announce- 
ments, liquidation  of  the  bank  (§41),  collection  of  original  capital, 
and  conditions  of  sale  and  purchase  of  securities.] 

§  41.  The  Empire  has  the  right,  on  January  1,  1891,  and  at  every 
ten  years  thereafter,  on  one  year's  previous  notice,  by  imperial  decree, 
in  agreement  with  the  Federal  Council,  delivered  by  the  Chancellor 
to  the  Directorium,  and  by  it  published,  to 

a)  abolish  the  Reichsbank  established  by  this  Act,  and  to  acquire 
the  real  estate  of  the  same  at  its  value  on  the  books  of  the  bank,  or 

b)  acquire  all  the  shares  of  the  Reichsbank  at  their  face  value. 

In  both  cases,  the  remaining  surplus,  not  required  to  cover  losses, 
goes  one-half  to  the  shareholders,  and  the  other  half  to  the  Empire. 

For  the  extension  of  the  term,  according  to  the  intent  of  the  first 
paragraph,  the  approval  of  the  Reichstag  is  necessary. 

Title  III — Private  Note-Banks 

§  42.  [Banks  already  having  the  right  to  issue  notes  are  confined 
to  business  within  the  state  which  granted  the  right.] 

§  43.  [Notes  of  such  banks  not  receivable  in  other  states.] 
§  44.  [Banks  are  freed  from  §  43  if  they  fulfil  by  January  1,  1876, 
the  following  conditions:  (1)  To  invest  by  January  1,  1877,  not  to  ex- 
ceed one-half  their  capital  and  surplus,  in  business  described  in  §  13, 
1-4  (especially  4),  and  publish  its  rates  on  discounts  and  Lombards; 
(2)  to  set  aside  20  per  cent  from  profits  above  4  }4  per  cent  until  sur- 
plus reaches  one-fourth  of  capital;  (3)  to  keep  the  same  cover  for  its 
notes  as  the  Reichsbank  (one-third  cash,  two-thirds  commercial  paper) ; 
(4)  to  redeem  its  notes  in  Berlin  or  Frankfort;  (5)  to  accept  all  other 
privileged  bank-notes  at  par;  (0)  not  to  object  to  right  of  issue  granted 


APPENDIX  III  381 

to  other  banks,  nor  if  its  notes  are  refused  at  public  offices;  (7)  to  have 
its  right  of  issue  terminated  by  the  Federal  Council,  as  in  §  41,  with- 
out compensation,  to  provide  for  uniformity  of  issues. 

Banks  fulfilling  the  above  conditions  may,  with  the  consent  of  the 
Federal  Council,  be  freed  from  §  42.  If  their  notes  do  not  exceed  their 
capital,  banks  are  freed  from  condition  (2),  and  do  business  in  the 
whole  empire.     The  Federal  Council  may  mitigate  condition  (1).] 

§45.  [Banks  wishing  to  comply  with  §44  must  prove:  (1)  That 
their  statutes  comply;  (2)  that  the  redemption  offices  have  been 
established.  Then  the  Chancellor  wiU  publicly  announce  their  ac- 
ceptance.] 

§  46.  [This  Act  to  be  regarded  as  notice  of  termination,  in  case 
the  right  to  issue  may  be  stopped.  Statutes  are  hereby  repealed 
which  make  the  right  dependent  on  the  note-issues  of  the  Prussian 
Bank.] 

§  47.  Any  change  in  the  fundamental  law,  the  statutes,  or  privi- 
leges, of  a  bank,  which  already  possesses  the  right  to  issue  notes,  must, 
so  long  as  this  authority  exists,  be  submitted  to  the  approval  of  the 
Federal  Council,  if  it  concerns  the  capital,  the  surplus,  its  field  of 
business,  the  cover  of  its  outstanding  notes,  or  the  duration  of  its 
privilege  to  issue  notes.  Directions  and  concessions  of  the  States 
which  limit  a  bank's  operations  regarding  discounts,  Lombards,  securi- 
ties and  deposits,  and  which  are  not  contained  in  this  Act,  are  not 
prohibited. 

The  approval  of  the  request  for  the  additional  requirement  is  to  be 
obtained  through  the  Government  of  the  State  concerned;  but  it  must 
be  refused,  if  the  bank  has  not  complied  with  the  provisions  of  §  44. 

[The  Bavarian  Government  is  empowered  to  extend  the  issues  of 
the  Bavarian  Note-Bank  to  the  maximum  of  70,000,000  marks;  or  it 
can  bestow  this  authority  on  any  other  bank  if  it  complies  with  §  44.] 

§  48.  [The  Chancellor  is  given  authority  to  examine  the  books 
and  cash  of  a  bank  having  the  right  to  issue  notes,  at  any  time,  to 
ascertain  if  it  is  complying  with  the  law,  or  with  §§42  and  43,  and 
as  to  the  accuracy  of  the  statements  (§8)  or  the  reports  on  which 
taxation  is  based  (§10).  The  rights  of  control  by  the  several  states 
is  not  interfered  with.] 

§  49.  [The  right  of  issue  is  lost,  by  (1)  the  close  of  the  period  for 
which  it  was  granted;  (2)  renoimcing  the  right;  (3)  bankruptcy;  (4) 
verdict  of  a  court;  or  (5)  the  regulations  of  a  state.] 

§  50.  [The  right  of  issue  can  be  taken  away  by  a  court,  on  the 
suit  of  the  Chancellor  or  a  German  state,  if  (1)  the  rules  as  to  cover 
or  the  amount  of  the  notes  have  been  violated;  (2)  §§  42  and  43  have 
not  been  followed,  in  the  period  before  the  Chancellor's  publication 
in  §45;  (3)  redemption  has  not  been  strictly  carried  out;  (4)  capital 


382  APPENDIX  III 

has  been  impaired  by  one-third.  Such  suits  come  under  the  com- 
mercial proxnsions  of  the  Imperial  Code  of  Law.  The  verdict  must 
order  the  withdrawal  of  all  notes  in  circulation.] 

§§  51,  52,  53.     [Details  for  carrying  out  the  judgment  of  the  court.] 

§  54.     [Corporations,  not  being  banks,  but  having  the  right  to  issue 

notes,  bonds,  or  obligations,  without  interest,  payable  to  bearer,  must 

conform  to  the  conditions  in  §§  2-6,  43,  and  47,  so  long  as  they  have 

paper  money  in  circulation.] 

IV — Penal  Directions 
§§  55-59.     [Relate  to  penalties  for  violation  of  the  Act.] 

V — Conclusion 

§  60.  [§§  6,  42,  43,  and  penal  clauses  of  §§  56  and  58,  come  into 
force  January  1,  1876.] 

§  61.  [Details  of  the  arrangement  by  which  the  Prussian  Bank  is 
to  be  ceded  to  the  empire  and  merged  into  the  Reichsbank:  (1)  Prus- 
sia withdraws  the  capital  (1,906,800  marks)  and  one-half  the  surplus, 
and  cedes  its  rights  on  following  conditions:  (2)  empire  to  pay  an  in- 
demnity of  15,000,000  marks;  (3)  one  share  of  old  for  one  of  new;  (4) 
or,  return  old  capital  and  due  proportion  of  surplus  to  old  sharehold- 
ers; (5)  Reichsbank  to  assume  liability  for  Prussian  loan  of  16,589,000 
marks,  under  the  treaty  of  January  28-31,  1856;  (6)  agreement  to  be 
made  on  value  of  real  estate.] 

§  62.  [Chancellor  to  put  out  Treasury  bills  (Sckatzanweisungen) 
at  interest  to  the  amount  of  shares  not  issued,  to  obtain  the  necessary 
capital  (§23).] 

§§  63-66.  [These  Treasury  notes  to  be  prepared  by  the  Prussian 
administration  of  the  debt;  the  rate  of  mterest  to  be  fixed  by  the 
Chancellor;  to  be  redeemed  from  revenues  of  the  empire;  to  be  issued 
through  the  Imperial  Treasury;  interest  postponed  four  years,  or 
capital  payments  postponed  thirty  years,  become  outlawed.  Inscrip- 
tion in  the  commercial  register  not  required  of  the  Reichsbank.] 

B 
ACT  ALTERING  THE  BANK  ACT,  AUGUST  4,  1914 

§  1.     §§9  and  10  of  the  Bank  Act  are  suspended  for  the  Reichsbank. 

§  2.  Satisfactory  bills  of  exchange  which  are  endorsed  by  the  Em- 
pire and  have  a  maturity  of  not  over  three  months,  even  if  they  have 
no  other  guarantee,  meet  the  requirements  of  §  13,  No.  2,  and  §  17  of 
the  Bank  Act. 


APPENDIX  III  383 

§  3.  Obligations  of  the  Empire  wliicli  are  payable  at  par  within 
three  months  hold  the  same  position,  in  the  meaning  of  §  17  of  the 
Bank  Act,  as  the  aforesaid  bills  of  exchange. 

§  4.     [Federal  Council  to  fix  the  date  when  this  Act  goes  into  effect.] 


SUPPLEMENT  TO  REGULATIONS  OF  THE  IMPERIAL  DEBT, 
AUGUST  4,  1914 

§  1.  As  a  means  for  securing  credit  to  defray  the  temporary  ex- 
traordinary expenses  of  the  Empire,  and  thereby  to  enlarge  the  ordi- 
nary funds  of  the  Imperial  Treasury,  means  of  payment  may  be  pro- 
vided, within  the  Umits  of  the  legal  requirements  (§  1  of  the  Regula- 
tion of  the  Imperial  Debt),  by  the  issue  of  bills  of  exchange. 

§  2.  The  bills  of  exchange  shall  be  drawn  at  the  order  of  the  Im- 
perial Chancellor  by  the  Administration  of  the  Imperial  Debt  with 
the  signature  of  two  of  its  members.  In  so  far  as  the  rules  governing 
bills  of  exchange  do  not  forbid,  these  bills  are  covered  by  the  same 
Imperial  Debt  regulations  as  those  applying  to  Treasury  bills  [Schatz- 
anweisungen]  in  the  terms  of  the  Act  of  February  22, 1904.  (R.  G.  B., 
p.  66.) 

§  3.  The  bills  issued  by  the  Empire  are  free  from  the  stamp  duties 
on  bills. 

§  4.  The  Federal  Council  is  empowered  to  fix  the  date  when  this 
law  shall  no  longer  be  in  force. 

§  5.     [Act  goes  into  effect  when  promulgated.] 

D 

ACT  MODIFYING  THE  MINT  ACT,  AUGUST  4,  1914 

§  1.  Until  further  notice  the  provisions  of  §  9,  Sec.  2,  paragraphs 
2  and  3,i  of  the  Mint  Act  of  June  1, 1909  (R.  G.  B.,  p.  507)  are  hereby 
changed  so  that  Imperial  Treasury  notes  [Reichskassensckeine]  and 
Reichsbank  notes  may  be  delivered  instead  of  gold  coin. 

§  2.  [The  Federal  Council  to  fix  the  date  when  the  original  order 
shall  be  restored.] 

§  3,     [Act  in  force  on  promulgation.] 

1  §  9.  No  one  is  compelled  to  accept  in  payments  silver  coins  to  an  amount 
greater  than  20  marks,  nor  nickel  or  copper  coins  to  a  greater  amount  than 
1  mark. 

Silver  coins  will  be  accepted  in  any  sums  by  the  treasuries  of  the  Empire  or 
of  the  States.  The  Federal  Council  designates  those  offices  which  will  pay 
on  demand  gold  coins  on  presentation  of  silver  coins  in  sums  of  not  less  than 
200  marks,  or  of  nickel  or  copper  coins  in  sums  of  not  less  than  50  marks.  It 
also  fixes  the  detailed  conditions  for  the  exchange. 


384  APPENDIX  III 


E 

DARLEHNSKASSEN  ACT  [REICHSGESETZBL.,  P.  340] 
AUGUST  4,  1914 

§  1.  In  Berlin  and  those  places  within  the  Empire,  in  which  there 
is  a  branch  or  agency  of  the  Reichsbank,  shall  be  established  wherever 
necessary,  on  the  order  of  the  Imperial  Chancellor,  according  to  the 
report  of  the  Committee  on  Trade  and  Commerce  of  the  Federal 
Council  [Bundesrath],  Loan  Bureaus  [Darlehnskassen]  for  the  purpose 
of  making  loans  on  security  to  meet  the  need  of  credit,  especially  in 
the  interest  of  trade  and  industry. 

Subsidiary  branches  of  the  Darlehnskassen  may  be  established  in 
other  than  the  designated  places  to  aid  in  the  work  of  lending  and  of 
building  up  depots. 

§  2.  For  the  full  amount  of  the  loan  granted  shall  be  paid  out  a 
special  form  of  money  known  as  "Darlelmskassenscheine."  These 
notes  shall  be  received  at  their  full  face  value  in  payment  at  all  the 
Imperial  oflBces  as  well  as  at  all  the  public  oflBces  of  the  States  of  the 
Empire;  in  private  transactions  they  shall  not  be  a  compulsory  means 
of  payment. 

In  the  meaning  of  §§  9,  17  and  44  of  the  Bank  Act  of  March  14, 
1875,  the  notes  of  the  Loan  Bureaus  stand  on  the  same  footing  as 
the  Reichskassenscheine  [Imperial  Treasury  notes]. 

The  total  amount  of  the  notes  of  the  Loan  Bureaus  shall  not  exceed 
1500  million  marks.  The  Federal  Coimcil  is  empowered  in  case  of 
necessity  to  raise  the  amount  of  notes  outstanding. 

No  notes  of  Loan  Bureaus  shall  be  issued  by  the  management  of 
the  Loan  Bureaus  (§13)  for  which  sufficient  security,  as  fixed  by 
§§4  and  6,  shall  not  be  provided. 

Before  their  issue,  an  exact  description  of  the  notes  shall  be  made 
public  by  the  management  of  the  Loan  Bureau. 

§  3.  Loans  can  be  given  for  not  less  than  100  marks,  and  shall 
not  run  as  a  rule  for  a  longer  term  than  three,  and  only  in  excep- 
tional circumstances  for  six,  months. 

§  4.     The  security  may  consist  of: 

a)  The  ple<lge  of  industrial,  agricultural  and  mineral  products  and 
non-perishable  merchandise,  stored  within  the  limits  of  the  Empire,  as 
a  rule,  for  one-half,  or  in  exceptional  cases,  for  two-thirds  of  their 
value,  according  to  differences  of  circumstances  and  salability. 

b)  The  pledge  of  securities  issued  by  the  Empire,  or  by  the  govern- 
ment of  a  German  State,  or  those  conforming  to  legal  requirements 
issued  by  corporations,  joint-stock  companies,  or  limited  partnerships, 
which  are  located  within  the  Empire,  at  a  reduction  from  their  current 


APPENDIX  III  385 

or  market  price.  Paper  not  running  in  the  name  of  the  bearer  must 
be  transferred  to  the  Loan  Bureaus. 

c)  The  pledge  of  other  securities  which  the  management  (§  13) 
declare  to  be  satisfactory. 

For  the  fulfillment  of  the  pledge  of  articles  mentioned  in  a)  it  suffices, 
instead  of  actual  delivery,  to  indicate  the  pledge  clearly  by  some  ex- 
ternal mark,  such  as  a  tablet  or  the  like. 

§  5.  Commodities  which  are  subject  to  serious  changes  of  price 
will  be  accepted  as  pledge  only  if  a  third  solvent  person  guarantees 
the  payment  of  the  loan. 

§  6.  A  loan  may  also  be  protected  by  the  pledge  of  claims,  which 
have  been  entered  in  the  Imperial  Debt  Records  [Rewhsschuldbuch] 
or  in  that  of  a  German  State,  at  a  reduction  from  the  current  value 
determined  according  to  the  face  value  and  the  rate  of  interest  of  the 
obligations  corresponding  to  the  pledged  claims. 

In  case  a  mortgage  on  a  claim  of  the  sort  mentioned  in  the  first 
paragraph  be  inscribed  on  the  records  in  favor  of  the  Loan  Bureau, 
it  is  sufficient  to  have  the  attestation  of  two  members  of  the  Board 
of  Directors. 

As  to  the  attestation,  the  regulations  of  §  183  of  the  Act  concerning 
matters  of  voluntary  jurisdiction  have  like  application. 

§  7.  If  a  mortgage  to  a  Loan  Bureau  has  been  entered  on  the 
reccJrds  (§6),  the  Bureau  thereby  acquires  a  right,  even  if  a  third  per- 
son has  a  claim  on  it,  prior  to  the  rights  of  that  third  person;  unless 
the  right  of  the  third  person  had  been  entered  at  the  time  of  the  in- 
scription of  the  mortgage  on  the  records;  or  was  known  at  that  time 
to  the  Bureau ;  or  was  not  known  because  of  gross  negligence. 

If  the  debtor  has  delayed  meeting  the  obligation  secured  by  the 
pledge,  the  Administration  of  the  Debt  Records  is  thereby  empowered 
and  obUged,  on  a  written  request  of  the  Loan  Bureau,  without  requir- 
ing any  proof  of  the  delay,  to  issue  obligations  payable  to  bearer  to 
liquidate  the  whole  or  a  corresponding  part  of  the  claim;  unless  an  or- 
der of  the  court  intervenes  which  forbids  the  payment  to  the  Loan 
Bureau;  or  unless  same  right  of  a  third  person,  or  a  limitation  of  the 
mortgage  in  favor  of  the  third  person  has  been  recorded,  which  was 
entered  earlier  than  the  pledge  in  favor  of  the  Loan  Bureau. 

The  Administration  of  the  Records  must  inform  the  Loan  Bureau 
of  later  entries  affecting  the  adequacy  of  the  obligation. 

As  to  the  satisfaction  of  the  Loan  Bureau  regarding  the  obligations 
discharged  by  the  Administration  of  the  Debt  Records,  the  regulations 
of  §§  10,  11  have  corresponding  application. 

§  8.  The  rate  of  interest  on  a  loan  granted  shall  as  a  rule  not  be 
higher  than  the  published  rate  at  which  the  Reichsbank  buys  bills  of 
exchange 


386  APPENDIX  III 

§  9.  The  security  should  suflSce  for  the  principal,  interest,  and 
expenses;  these  secondary  claims  should  be  deducted  from  the  sum 
of  the  loan. 

§  10.  If  payment  is  not  made  at  maturity,  the  Loan  Bureau  may 
sell  the  security  through  one  of  its  officials  or  a  broker  and  reimburse 
itself  out  of  the  proceeds.  The  Loan  Bureau  shall  dispose  of  the 
security  only  to  the  highest  bidder  in  the  open  market. 

§  11.  Also,  if  the  debtor  should  go  into  bankruptcy,  the  Loan 
Bureau  retains  the  right  to  sell  the  security  without  an  order  of  the 
Court.  [§  127,  Sec.  2,  of  the  Bankruptcy  Act  of  May  20,  1898,  does 
not  apply.] 

§  12.  The  Loan  Biu-eaus  form  independent  institutions  with  the 
attributes  and  rights  of  a  legal  'persona.  Their  business  enjoys  free- 
dom from  stamps  and  duties. 

§  13.  The  Reichsbank  assumes  the  management  of  the  Loan  Bu- 
reaus under  the  direction  of  the  Imperial  Chancellor  in  the  interest 
of  the  Empire,  but  quite  apart  from  its  other  business.  The  general 
administration  shall  be  established  in  Berlin  in  a  special  bank  de- 
partment known  as  the  "Hauptverwaltung  der  Darlehnskassen "  ac- 
cording to  more  detailed  directions  given  by  the  Imperial  Chancellor. 
In  addition,  there  shall  be  appointed  for  each  Loan  Bureau  a  Special 
Board  of  Directors  subordinate  to  the  Hauptverwaltung,  to  which 
shall  be  appointed  by  the  Imperial  Chancellor  a  representative  of  the 
Empire  as  well  as  members  from  the  commercial  or  industrial  classes. 
The  Imperial  Chancellor  issues  instructions  for  the  conduct  of  the  busi- 
ness of  the  Loan  Bureaus. 

§  14.  The  opening  of  the  Loan  Bureaus  is  to  be  brought  to  general 
attention  over  the  names  of  the  imperial  representative  and  the  mem- 
bers of  the  Board  of  Directors  through  the  journals  designated  for 
official  notices. 

§  15.  Two  of  the  members  of  the  Board  of  Directors  chosen  from 
the  commercial  or  industrial  classes  shall,  in  alternate  weeks,  manage 
the  business  of  the  Loan  Bureaus  and  see  that  the  provisions  of  this 
Act  are  observed. 

§  16.  The  imperial  representative  must  keep  informed  of  the  whole 
business  of  the  Bureau  and  has  a  right  of  veto  upon  all  applications 
for  loans.  The  determination  of  the  reduction  to  be  made  from  the 
current  or  market  price  of  the  securities  pledged,  within  the  limits  set 
by  the  regulations  of  the  business,  rests  with  the  imperial  representa- 
tive after  receiving  the  advice  of  the  Board  of  Directors. 

§  17.  The  profits  of  the  Loan  Bureaus,  after  deducting  the  ex- 
penses of  administration,  shall  be  applied  to  covering  any  possible 
losses  and  to  the  future  redemption  of  the  notes  of  the  Bureaus.  Any 
possible  surplus  goes  to  the  Imperial  Treasury. 


APPENDIX  III  387 

§  18.  The  notes  of  the  Loan  Bureaus  shall  be  issued  in  denomina- 
tions of  5,  10,  20  and  50  marks.  The  issue  of  larger  denominations 
of  the  notes,  and  the  proportions  in  which  the  various  denominations 
are  to  be  used,  will  be  determined  by  the  regulations  of  the  Imperial 
Chancellor.  [Under  this  provision,  and  by  Act  of  August  31,  1914, 
denominations  of  1  and  2  marks  were  issued.] 

The  notes  of  the  Loan  Bureaus  shall  be  issued  by  the  Administration 
of  the  Imperial  Debt  [Reichsschuldenverwaltung],  within  the  maximum 
limits  (§  2,  Paragraph  3),  according  to  the  orders  of  the  Imperial 
Chancellor  given  to  the  Administration-in-Chief  of  the  Loan  Bureaus, 
which  assumes  the  responsibility  for  the  issue. 

The  control  over  the  preparation  and  issue  of  the  notes  of  the  Loan 
Bureaus  is  exercised  by  the  Commission  on  the  Imperial  Debt. 

The  Imperial  Chancellor  is  to  make  pubhc  monthly  the  amount  of 
the  notes  of  the  Loan  Bureaus  outstanding. 

§  19.  As  soon  as  the  need  for  a  Loan  Bureau  no  longer  exists,  the 
Imperial  Chancellor  is  to  close  it  up  and  make  public  the  fact. 

On  the  return  of  peace,  the  notes  of  the  Loan  Bureaus,  issued  by 
virtue  of  this  Act,  shall  be  withdrawn  according  to  the  detailed  in- 
structions of  the  Federal  Council. 

§  20.  [§§  146-149,  lol,  152,  and  360,  Numbers  4-6,  of  the  criminal 
law  apply  to  these  notes.] 

§  21.  The  advances  on  securities  [Lombards]  granted  by  the 
Reichsbank,  in  the  period  from  August  3,  1914,  to  the  establishment 
of  the  Loan  Bureaus,  on  other  securities  than  those  mentioned  in 
§  13,  No.  3,  of  the  Bank  Act  [March  14,  1875],  are  hereby  ratified. 

§  22.    This  law  goes  into  effect  on  the  day  of  its  promulgation. 


APPENDIX  IV 

UNITED  STATES 


AN  ACT 

To  Amend  Section  Twenty-seven  of  an  Act  Approved  December 
Twenty-third,  Nineteen  Hundred  and  Thirteen,  and  Known 
AS  THE  Federal  Reserve  Act. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  America  in  Congress  assembled.  That  section  twenty-seven 
of  the  Act  approved  December  twenty-third,  nineteen  hundred  and 
thirteen,  known  as  the  Federal  Reserve  Act  is  hereby  amended  and 
reenacted  to  read  as  follows: 

"Sec.  27.  The  provisions  of  the  Act  of  May  thirtieth,  nineteen 
hundred  and  eight,  authorizing  national  currency  associations,  the 
issue  of  additional  national-bank  circulation,  and  creating  a  National 
Monetary  Commission,  which  expires  by  limitation  under  the  terms 
of  such  Act  on  the  thirtieth  day  of  June,  nineteen  hundred  and  four- 
teen, are  hereby  extended  to  June  thirtieth,  nineteen  hundred  and 
fifteen,  and  sections  fifty-one  hundred  and  fifty-three,  fifty-one  hun- 
dred and  seventy-two,  fifty-one  hundred  and  ninety-one,  and  fifty-two 
hundred  and  fourteen  of  the  Revised  Statutes  of  the  United  States, 
which  were  amended  by  the  Act  of  May  thirtieth,  nineteen  hundred 
and  eight,  are  hereby  reenacted  to  read  as  such  sections  read  prior 
to  May  thirtieth,  nineteen  hundred  and  eight,  subject  to  such  amend- 
ments or  modifications  as  are  prescribed  in  this  Act:  Provided,  however. 
That  section  nine  of  the  Act  first  referred  to  in  this  section  is  hereby 
amended  so  as  to  change  the  tax  rates  fixed  in  said  Act  by  making 
the  portion  applicable  thereto  read  as  follows: 

"National  banking  associations  having  circulating  notes  secured 
otherwise  than  by  bonds  of  the  United  States,  shall  pay  for  the  first 
three  months  a  tax  at  the  rate  of  three  per  centum  per  annum  upon 
the  average  amount  of  such  of  their  notes  in  circulation  as  are  based 
upon  the  deposit  of  such  securities,  and  afterwards  an  additional  tax 
rate  of  one-half  of  one  per  centum  per  annum  for  each  month  until 
a  tax  of  six  per  centum  per  annum  is  reached,  and  thereafter  such 
tax  of  six  per  centum  per  annum  upon  the  average  amount  of  such 
notes:  Provided  further.  That  whenever  in  his  judgment  he  may  deem 

388 


APPENDIX  IV  389 

it  desirable,  the  Secretary  of  the  Treasury  shall  have  power  to  sus- 
pend the  limitations  imposed  by  section  one  and  section  three  of  the 
Act  referred  to  in  tliis  section,  which  prescribe  that  such  additional 
circulation  secured  otherwise  than  by  bonds  of  the  United  States  shall 
be  issued  only  to  National  banks  having  circulating  notes  outstanding 
secured  by  the  deposit  of  bonds  of  the  United  States  to  an  amount 
not  less  than  forty  per  centum  of  the  capital  stock  of  such  banks,  and 
to  suspend  also  the  conditions  and  limitations  of  section  five  of  said 
Act  except  that  no  bank  shall  be  permitted  to  issue  circulating  notes 
in  excess  of  one  hundred  and  twenty-five  per  centum  of  its  unimpaired 
capital  and  surplus.  He  shall  require  each  bank  and  currency  asso- 
ciation to  maintain  on  deposit  in  the  Treasury  of  the  United  States  a 
sum  in  gold  sufficient  in  his  judgment  for  the  redemption  of  such 
notes,  but  in  no  event  less  than  five  per  centum.  He  may  permit 
National  banks,  during  the  period  for  which  such  provisions  are  sus- 
pended, to  issue  additional  circulation  under  the  terms  and  conditions 
of  the  Act  referred  to  as  herein  amended:  Provided  further.  That  the 
Secretary  of  the  Treasury,  in  his  discretion,  is  further  authorized  to 
extend  the  benefits  of  this  Act  to  all  qualified  State  banks  and  trust 
companies,  which  have  joined  the  Federal  reserve  system,  or  which 
may  contract  to  join  within  fifteen  days  after  the  passage  of  this  Act." 
Approved,  August  4,  1914. 

B 

AN  ACT 

To  Provide  for  the  Admission  of  Foreign-Built  Ships  to  Ameri- 
can Registry  for  the  Foreign  Trade,  and  for  Other  Pur- 
poses. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  America  in  Congress  assembled.  That  the  words  "not  more 
than  five  years  old  at  the  time  they  apply  for  registry"  in  section  five 
of  the  Act  entitled  "An  Act  to  provide  for  the  opening,  maintenance, 
protection,  and  operation  of  the  Panama  Canal  and  the  sanitation 
and  government  of  the  Canal  Zone,"  are  hereby  repealed. 

Sec.  2.  That  the  President  of  the  United  States  is  hereby  author- 
ized, whenever  in  his  discretion  the  needs  of  foreign  commerce  may 
require,  to  suspend  by  order,  so  far  and  for  such  length  of  time  as  he 
may  deem  desirable,  the  provisions  of  law  prescribing  that  all  the 
watch  officers  of  vessels  of  the  United  States  registered  for  foreign 
trade  shall  be  citizens  of  the  United  States. 

Under  like  conditions,  in  like  manner,  and  to  like  extent  the  Presi- 
dent of  the  United  States  is  also  hereby  authorized  to  suspend  the 


390  APPENDIX   IV 

provisions  of  the  law  requiring  survey,  inspection,  and  measurement 
by  officers  of  the  United  States  of  foreign-built  vessels  admitted  to 
American  registry  under  this  Act. 

Sec.  3.     This  Act  shall  take  effect  immediately. 

Approved,  August  18,  1914. 


AN  ACT 

To  Authorize  an  Issue  of  Bonds  to  Meet  Expenditures  fob 
THE  National  Security  and  Defense,  and,  for  the  Purpose 
OF  Assisting  in  the  Prosecution  of  the  War,  to  Extend 
Credit  to  Foreign  Governments,  and  for  Other  Purposes. 
April  24,  1917. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United 
States  of  Avierica  in  Congress  assembled.  That  the  Secretary  of  the 
Treasury,  with  the  approval  of  the  President,  is  hereby  authorized  to 
borrow,  from  time  to  time,  on  the  credit  of  the  United  States  for  the 
purposes  of  this  Act,  and  to  meet  expenditures  authorized  for  the 
national  security  and  defense  and  other  public  purposes  authorized 
by  law  not  exceeding  in  the  aggregate  $5,000,000,000,  exclusive  of 
the  sums  authorized  by  section  four  of  this  Act,  and  to  issue  therefor 
bonds  of  the  United  States. 

The  bonds  herein  authorized  shall  be  in  such  form  and  subject  to 
such  terms  and  conditions  of  issue,  conversion,  redemption,  maturities, 
payment,  and  rate  and  time  of  payment  of  interest,  not  exceeding 
three  and  one-half  per  centum  per  annum,  as  the  Secretary  of  the 
Treasury  may  prescribe.  The  principal  and  interest  thereof  shall  be 
payable  in  United  States  gold  coin  of  the  present  standard  of  value 
and  shall  be  exempt,  both  as  to  principal  and  interest,  from  all  taxa- 
tion, except  estate  or  inheritance  taxes,  imposed  by  authority  of  the 
United  States,  or  its  possessions,  or  by  any  State  or  local  taxing  au- 
thority; but  such  bonds  shall  not  bear  the  circulation  privilege. 

The  bonds  herein  authorized  shall  first  be  offered  at  not  less  than 
par  as  a  popular  loan,  under  such  regulations  prescribed  by  the  Sec- 
retary of  the  Treasury  as  will  give  all  citizens  of  the  United  States  an 
equal  opportunity  to  participate  therein;  and  any  portion  of  the 
bonds  so  offered  and  not  subscribed  for  may  be  otherwise  disposed 
of  at  not  less  than  par  by  the  Secretary  of  the  Treasury;  but  no  com- 
missions shall  be  allowed  or  paid  on  any  bonds  issued  under  authority 
of  this  Act. 

Sec.  2.  That  for  the  purpose  of  more  effectually  providing  for  the 
national  security  and  defense  and  prosecuting  the  war  by  establishing 


APPENDIX  IV  391 

credits  in  the  United  States  for  foreign  governments,  the  Secretary 
of  the  Treasury,  with  the  approval  of  the  President,  is  hereby  author- 
ized, on  behalf  of  the  United  States,  to  purchase,  at  par,  from  such 
foreign  governments  then  engaged  in  war  with  the  enemies  of  the 
United  States,  their  obligations  hereafter  issued,  bearing  the  same 
rate  of  interest  and  containing  in  their  essentials  the  same  terms  and 
conditions  as  those  of  the  United  States  issued  under  authority  of 
this  Act;  to  enter  into  such  arrangements  as  may  be  necessary  or 
desirable  for  establishing  such  credits  and  for  purchasing  such  obliga- 
tions of  foreign  governments  and  for  the  subsequent  payment  thereof 
before  maturity,  but  such  arrangements  shall  provide  that  if  any  of 
the  bonds  of  the  United  States  issued  and  used  for  the  purchase  of 
such  foreign  obligations  shall  thereafter  be  converted  into  other  bonds 
of  the  United  States  bearing  a  higher  rate  of  interest  than  three  and 
one-half  per  centum  per  annum  under  the  provisions  of  section  five 
of  this  Act,  then  and  in  that  event  the  obligations  of  such  foreign 
governments  held  by  the  United  States  shall  be,  by  such  foreign  gov- 
ernments, converted  in  like  manner  and  extent  into  obligations  bear- 
ing the  same  rate  of  interest  as  the  bonds  of  the  United  States  issued 
under  the  provisions  of  section  five  of  this  Act.  For  the  purposes  of 
this  section  there  is  appropriated,  out  of  any  money  in  the  Treasury 
not  otherwise  appropriated,  the  sum  of  $3,000,000,000,  or  so  much 
thereof  as  may  be  necessary:  Provided,  That  the  authoritj'  granted  by 
this  section  to  the  Secretary  of  the  Treasury  to  purchase  bonds  from 
foreign  governments,  as  aforesaid,  shall  cease  upon  the  termination 
of  the  war  between  the  United  States  and  the  Imperial  German  Gov- 
ernment. 

Sec.  3.  That  the  Secretary  of  the  Treasury,  under  such  terms  and 
conditions  as  he  may  prescribe,  is  hereby  authorized  to  receive  on 
or  before  maturity  payment  for  any  obligations  of  such  foreign  gov- 
ernments purchased  on  behalf  of  the  United  States,  and  to  sell  at 
not  less  than  the  purchase  price  any  of  such  obligations  and  to  apply 
the  proceeds  thereof,  and  any  payments  made  by  foreign  govern- 
ments on  account  of  their  said  obligations  to  the  redemption  or  pur- 
chase at  not  more  than  par  and  accrued  interest  of  any  bonds  of  the 
United  States  issued  under  authority'  of  this  Act;  and  if  such  bonds 
are  not  available  for  this  purpose  the  Secretary  of  the  Treasury  shall 
redeem  or  purchase  any  other  outstanding  interest-bearing  obligations 
of  the  United  States  which  may  at  such  time  be  subject  to  call  or 
which  may  be  purchased  at  not  more  than  par  and  accrued  interest. 

Approved,  April  24,  1917. 


392 


APPENDIX  IV 


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INDEX 


Acceptance,  explained,  71,  82,  280, 
345,  346,  359;  houses,  70,  72;  Eng- 
lish, 82,  86,  88,  91,  326. 

Agadir,  152,  154. 

Aldrich-Vreeland  notes,  100,  n.,  299- 
305. 

Algeciras,  152. 

American  Foreign  Securities  Corpora- 
tion, 188,  n. 

Anglo-French  loan,  129,  339,  360. 

Argentina,  154,  307,  316. 

Austria-Hungary,  20,  78,  154,  200, 
220,  250,  285;  comparative  growth 
of,  14-15;  policy  of,  37;  Bankof,  234. 

Bagdad  Railway,  34,  154,  200. 

Balkans,  31,  37,  78;  France  and,  152- 
153;  wars  of,  154-155,  199,  200, 
204,  281. 

Bank  of  England,  place  in  organiza- 
tion of  credit,  70,  74;  banking  re- 
serves of,  75,  102-105;  aids  stock 
exchange,  81;  saved  the  day  in  the 
crisis,  84,  89;  suspension  of  Bank 
Act,  87,  88;  accounts  of,  90;  loca- 
tion of  reserves  in,  103,  329;  small 
notes  of,  94,  100;  French  criticism 
of,  99;  in  time  of  stress,  106;  sound- 
ness of,  111-114;  increase  of  notes 
of,  119;  little  English  inflation, 
120;  superior  to  Bank  of  France, 
178;  compared  with  Reichsbank, 
269. 

Bank  of  France,  144;  notes  of,  follow 
discounts,  147-149;  function  of  re- 
serves in,  150;  notes  TO.  checks,  162- 
164,  165;  suspension  of  specie  pay- 
ments, 164,  171;  reliance  on,  in 
crisis,  165-168;  increase  of  loans, 
166-168;  reduction  of  moratorium 
paper,  168;  bank  and  the  bourse, 
169-170;  vast  increase  in  notes  of, 
172;   advances  to  state,  173;   vari- 


ous limits  to  note-issues,  174; 
soundness  of,  175;  monetary  and 
fiscal  confusion,  176;  contrasted 
with  Bank  of  England,  178;  effect 
of  retaining  gold  on,  181;  deprecia- 
tion of  notes  of,  181-184,  187. 

Bank,  Imperial,  of  Germany,  con- 
trasted with  Bank  of  England,  178, 
207,  222,  269;  control  over  gold, 
203;  control  over  other  banks,  204; 
under  imperial  control,  205;  or- 
ganization of,  205-206;  Kontingent, 
207,  227;  cover  for  notes,  207,  227; 
note-issues  of,  208,  230;  function 
of,  208;  business  of,  209;  transfers, 
210;  lending  power  widened,  227; 
loans  to  government,  228;  reserves 
of,  229;  pressure  on,  229-232;  de- 
preciation of  notes,  233,  255;  cam- 
paign for  gold,  234-236;  inflation 
of  credit  of,  268;  suspension  of  gold 
payments,  221. 

Banking,  reserves,  64,  68,  96,  150,  292; 
power,  11,  294,  297;  assets  in  Ger- 
many, 204-205;  foreign,  76;  in 
United  States,  11. 

Banks,  joint-stock,  English,  73,  81, 
83,  91,  94,  97,  119;  French,  145- 
147;  German,  204,  212. 

Bayer,  19. 

Belgium,  20,  51,  77,  153, 158,  234,  241; 
German  notes  in,  232. 

Bill-brokers,  72,  74,  83. 

Bills,  see  Exchange,  Treasury. 

Bonn,  M.  J.,  265,  n.  1,  267,  n.  1,  270, 
n.  1. 

Bosnia,  154. 

Brazil,  74,  154,  316. 

Bowley,  A.  L.,  107. 

Caillaux,  153. 
Cameroons,  153,  n.,  154. 
Canada,  102,  103,  109,  329, 


401 


402 


INDEX 


Capital,  mobilityof,  110;  destruction  of, 
49,  50,  238,  240,  268;  and  credit,  44. 

Checks,  in  England,  87,  95,  n.,  94,  99; 
in  France,  162-164;  in  Germany, 
210,  232;  in  United  States,  11,  62- 
67,  294. 

Chemistry,  7. 

Chronology  of  war,  79. 

Clearing-house,  10;  banks,  292;  loan 
certificates,  297,  301;  in  France, 
162-164;  in  Germany,  210-211. 

Coal,  18,  52,  159. 

Combes,  152,  n. 

Consumption,  superfluous,  46,  48; 
limiting  war,  53;  war  and,  306; 
German,  241. 

Cotton,  309-312;  Trading  Corpora- 
tion, 310;  Pool,  311. 

Coulisse,  156,  n.,  157. 

Credit,  rise  of,  10;  and  war,  39,  84, 
283;  based  on  goods,  40,  45,  51,  68. 
Ill,  284;  war  carried  on  by,  41,  53; 
why  granted,  41;  at  a  bank,  42;  of 
a  government,  43,  114,  133,  137; 
and  capital,  44;  and  money,  45; 
of  a  state  depends  on  productive 
power,  57,  114;  not  limited  by 
money,  58,  60-63,  284;  a  reversion 
to  barter,  60;  redemption  of,  61; 
how  tested,  63;  how  affected  by 
imports  of  gold,  63;  supposed 
break-dowTi  of,  64,  69,  80;  super- 
sedes money,  67;  international,  69 
comparative  study  of,  70,  143,  175 
normality  of,  in  war-time,  106,  114 
gives  time  for  liquidation,  112;  and 
inflation,  64,  117,  148,  206,  218,  224, 
230,  243,  347-353;  function  of,  in  a 
crisis,  161;  interdependence  of, 
279,  280. 

Credit,  in  England,  70;  expansion  by 
Bank  of  England,  75;  suspension 
of  Bank  Act,  88;  little  inflated,  120; 
normality  of,  in  war,  114;  sound- 
ness of,  111,  114,  121;  as  to  govern- 
ment borrowing,  133,  137;  London 
as  a  centre  of,  324,  326,  327,  345. 

Credit,  in  France,  143;  organization 
of,    144,    167;    expanded   in   note- 


issues,  148;  crippled  in  Balkan  wars, 
155;  in  the  crisis  of  1914,  161,  165; 
suspension  of  gold  payments,  164; 
inflation  of,  166-168,  172,  173,  175, 
176;  public  and  private,  189;  and 
money,  148-149,  176-178,  182,  184. 

Credit,  in  Germany,  weakness  of,  200; 
organization  of,  205-213;  loan 
bureaus,  213-218,  264-268;  Kriegs- 
kredit  banks,  218;  inflation  of,  206, 
218,  224,  230,  243;  shock  to,  220; 
limit  to,  59;  solvency  of,  241,  242, 
244,  265-268;  pyramiding  of,  266; 
relation  to  wealth,  239. 

Credit,  in  United  States,  278;  system 
of,  284,  296;  dependence  of,  on 
Europe,  270-281;  effect  of  war  on, 
284,  292,  296;  crisis  in,  283,  294, 
306;  inflation  of,  347-353,  351;  re- 
lation of,  to  prices,  348,  352;  work- 
ing of,  296,  304,  353-361;  govern- 
ment, 357,  361;  Aldrich-Vreeland 
notes,  299-305. 

Cuba,  307. 

Curb  market,  320,  n. 

Currency  notes,  English,  88,  92-101, 
114. 

Darlehnskassen,  see  Loan  biu-eaus. 

Debts,  burden  of,  56,  134;  discount 
future  production,  113;  of  Great 
Britain,  133-141;  of  France,  155, 
191-196;  ofGermany,  258, 261-271, 
276;  of  United  States  to  Europe, 
281. 

Denmark,  77,  132,  223,  240,  245,  313, 
342. 

Deposit-currency,  10,  11;  English  or- 
igin of,  94;   function  of,  62-67,  322. 

Destruction,  in  war,  46,  48,  49,  56; 
in  peace,  47;  of  capital,  49,  50,  238, 
240. 

Discount  houses,  72. 

Dyes,  19,  253,  314. 

Education,  8,  9,  26. 
England,  see  Great  Britain. 
European  War,  causes  of,  1,  32,  36- 
38,  199. 


INDEX 


403 


Exchange,  bills  of,  explained,  11,  41, 
73,  249,  280,  323,  346;  problem  of 
foreign,  in  England,  121-133,  323- 
324,  326,  341;  shipping-points  of, 
122,  130,  186,  251,  323;  factors  af- 
fecting prices  of,  125,  324,  336; 
movement  of  gold  from  England, 
129-131;  and  depreciation  of  paper 
money,  125,  131,  185,  248,  255;  on 
Holland,  132,  252,  342-343;  on 
Scandinavia,  132,  252,  342-344; 
on  Switzerland,  132,  252,  342; 
French,  184-189,  341;  German, 
249;  American,  283,  292,  319-346; 
South  American,  317-319,  344-346; 
"Dollar,"  317,  344-346;  on  neu- 
trals, 342-344;  on  Japan,  344;  on 
Spain,  344. 

Exhaustion,  economic,  52;  financial, 
55;  in  Germany,  274-276. 

Federal  Reserve  Banks,  67,  68,  100, 
137,  n.,  293,  299,  300,  303,  315,  337, 
349-352,  360. 

Finance  bills,  325. 

Finance,  public,  54-56;  English,  133- 
142;  French,  189-196;  German, 
257-274. 

Foxwell,  H.  S.,  116,  n.,  131,  n. 

France,  comparative  growth  of,  14, 
15;  weakness  of,  36;  private  banks 
of,  145-147;  provincial  banks  of, 
147;  unprepared  for  war,  152;  Ger- 
man intrigue  in,  152,  153;  relations 
with  Balkans,  152-153,  155;  with- 
draws capital  from  Germany,  154; 
eflFect  of  radicalism  in,  155;  Franco- 
Prussian  War,  16,  36,  156,  181,  204; 
indemnity  of  1871,  156;  effect  of 
war  on  bourse,  156,  157;  war  and 
production,  158;  suspension  of  gold 
payments,  164;  hoarding  in,  164; 
moratorium  in,  159-162,  164,  165, 
167,  168;  gold  stock  in,  171;  con- 
fusion of  monetary  and  fiscal  needs, 
176;  prices  in,  181-183;  foreign 
trade  of,  182,  186;  foreign  exchange 
of,  184-189,  341;  loans  in  United 
States  of,  188;   debt  of,  155,  191- 


196;  treasury  bills,  191;  wealth  and 

income  of,  194. 
Franco-Prussian    War,    16,    36,    156, 

180,  n.,  181,  204. 
Franklin,  E.  L.,  105,  n. 
Freedom  of  the  seas,  31,  35,  36. 

Germany,  early,  12,  13;  followed  in 
steps  of  England,  14;  progress  of, 
12,  14,  16-22;  causes  of  progress, 
23-29;  centralization  of  industry 
in,  27;  an  ally  of  trade,  28;  desire 
of,  for  foreign^markets,  29-30;  trade 
with  England,  30-32;  exports  of, 
26,  31,  244;  colonial  policy  of,  32; 
hatred  of  English,  33;  hunger  for 
new  territory,  34;  socialism  in,  35; 
industrial  success  before  the  war, 
35;  militarism,  36;  borrowing  at 
home,  51,  269-27U  railways  of,  52; 
non-recurring  taS  of  1913,  152,  201; 
financial  mobilization  of,  56;  in- 
trigues of,  in  France,  153;  lost 
French  capital  on  Agadir  incident, 
154;  preparedness  of,  198,  200,  205, 
213-214;  loan  bureaus  of,  213-218, 
264-265;  suspension  of  gold  pay- 
ments, 221;  accumulating  gold  in, 
201,  203,  233;  war  chest  of,  202, 
229;  inflation  in,  218,  230,  243,  247; 
effect  of  war  on  bourse,  220;  hoard- 
ing in,  221;  disturbance  to  indus- 
try in,  222-224,  244;  prices  in,  222, 
243-249;  trade  with  United  States, 
244;  war  loans  of,  231,  258-263,  267; 
debt  of,  59,  258,  261-271;  repudi- 
ation in,  271,  276;  notes  of,  in  Bel- 
gium, 232;  production  of,  reduced, 
241;  income  of,  59,  275;  wealth 
of,  238,  275;  duration  of  war,  276; 
recovery  after  war,  276. 

Gibson,  A.  H.,  85,  n. 

Gide,  179,  n. 

Gold,  British  stock  of,  96,  n.;  in  Bank 
of  England,  103;  British  control  of, 
103;  in  various  reserves,  102,  234, 
n.  1;  French  stock  of,  171;  Ger- 
man stock  of,  201,  203,  231,  234; 
campaign   for,   in   Germany,    201; 


404 


INDEX 


standard,  British,  101;  suspension 
of,  payments  in  various  countries, 
102,  103;  suspension  in  France, 
164,  171;  suspension  in  Germany, 
209,  n.  2,  221;  Pool,  in  United 
States,  331-333. 

Great  Britain,  first  with  new  technic, 
13;  growth  of,  15,  17;  trade  with 
Germany,  30,  97,  106;  reason  for 
joining  in  the  war,  38;  unprepared, 
78;  foreign  investments  of,  76; 
war  crisis  of,  80;  Stock  Exchange 
closed,  81;  accepting  houses,  72,  88; 
discount  houses,  72;  resort  to  gov- 
ernment paper,  88;  moratorium  in, 
86,  91,  109,  111;  guaranty  to  Bank 
of  England,  111;  dislocation  of 
trade,  106;  exports  and  imports  of, 
45,  77,  126;  gold  redemption  in, 
105;  foreign  exchange,  121-133; 
loans  of,  in  United  States,  67,  128; 
war  debt  of,  133-141 ;  forms  of  debt, 
138;  soundness  of  her  credit,  90, 
111,  120;  ability  to  carry  debt,  141. 

Greece,  155. 

Havenstein,  259,  274. 

Helfferich,  K.,  12,  n.,  18,  n.,  22,  n.,  23, 

32,  n.,  51,  n.,  194,  205,  n.,  272,  273, 

254,  n.  2,  272,  273. 
Hertzegovina,  154. 
Hoarding,  in  England,  97;  in  France, 

164;  in  Germany,  221. 
Holland,  30,  77,  132,  157,  223,  235, 

240,  245,  252,  313,  342. 

Income,  British,  78;  French,  194; 
German,  59,  275. 

India,  102,  314. 

Industrial  revolution,  1;  industrial 
colonization,  6;  gains  of  mechanics 
in,  7;  of  chemistry,  7;  changed  or- 
ganization of  business,  8;  educa- 
tion, 8-9;  rise  of  credit,  10;  new 
technic,  23;  common  to  many 
countries,  24;  related  to  cause  of 
war,  34. 

Inflation,  64,  115,  117,  118,  120,  148, 
218,   230,   243,   247;    British,    115, 


117, 120;  French,  160-168,  172, 173, 
175,   176,   179;    German,  206,  218, 
224,  230,  243,  247;  American,  347- 
353,  351. 
Italy,  30,  77,  79,  313. 

Japan,  109,  344. 
Jaures,  152. 

Keynes,  J.   N.,  Jr.,  91,  n.,   103,   n., 

104,  n.,  109,  n. 
Kirkaldy,  96,  n.,  98,  n.,  105,  n.,  128, 

n.,  131,  n.  2. 
Kitchener,  39. 
Kriegskredit  banks,  218. 
Kronprinzessin  Cecilie,  S.S.,  291,  328. 
Krupp,  28,  n.,  259,  212. 

Labor,  losses  of,  52. 

Leroy-Beaulieu,  P.,  196,  n. 

Liebig,  25. 

Liesse,  A.,  99,  163,  n. 

Lloyd-George,  65,  92,  109. 

Loan  bureaus,  German,  213-218,  264- 
265,  268. 

Loans,  at  banks,  not  really  limited  by 
reserves,  40,  41,  51,  68,  111,  284 
of  Great  Britain,  67,  128,  133-141 
of  France,  155,  167,  188,  191-196 
of  Germany,  59,  231,  258-263,  267, 
271;  of  United  States,  129,  339- 
340,  359-361. 

Lombards,  207,  209,  221. 

Loree,  L.  F.,  127,  n.,  322,  n.  1. 

Mexico,  154. 

Mitteleuropa,  33,  37,  153,  199. 

Money,  evolution  of,  10;  paper,  54; 
quantity  of,  55;  remedy  in  a  crisis, 
65;  does  not  limit  credit,  58,  60; 
creditdrawnin  termsof,  66;  quantity 
theory  of,  116-121,  348-350;  EngUsh 
currency  notes,  93-100;  increase  of, 
in  various  countries,  118-247;  and 
credit  in  France,  148-149,  176-179, 
182,  184;  German  theories  of,  197, 
202;  effect  of  redemption  on  value 
of,  202,  248;  inconvertible,  in  (Jer- 
many,  204,  237,  248,  268;   Aldrich- 


INDEX 


405 


Vreeland  notes  in  United  States, 
299-305;  confusion  of  monetary 
and  fiscal  functions,  54,  99,  176-177. 

Moratorium,  English,  86,  91,  109,  111; 
French,  159-162,  164,  165,  167,  168; 
German,  224-227;  evil  of,  160;  re- 
lation of,  to  credit,  226. 

Morgan,  J.  P.,  &  Co.,  67,  188,  n. 

Morocco,  152,  154,  200,  204. 

NorT\'ay,  30,  77,  107,  132,  223,  240. 
Noyes,  A.  D.,  196. 

Ottawa,  103,  104,  n.,  122,  329,  330, 
332. 

Paish,  Sir  G.,  115,  n.  2. 

Palgrave,  Sir  R.  H.  I.,  97,  n.,  100. 

Parquet,  80,  156,  n.,  170;  closed,  157. 

Prices,  in  England,  115-121;  in 
France,  181-183;  in  Germany,  222, 
243-249;  causes  of  high,  248;  and 
credit  in  United  States,  348,  352. 

Quantity  theory,  see  Money. 

Redemption,  immediate  and  ultimate, 
61,  63,  105,  118,  130,  151,  180,  202, 
236,  248. 

Reichsbank,  see  Imperial  Bank  of 
Germany. 

Ribot,  167,  n.,  195. 

Rbdern,  Count  von,  263,  273,  n.  2. 

Rouvier,  152,  n. 

Rumania,  51,  155. 

Russia,  30,  31,  43,  77,  153,  200,  212, 
221,  234,  250,  286,  339,  343;  com- 
parative growth  of,  14,  15;  trade 
of,  30,  245;  policy  of,  37;  finances 
of,  55,  154;  paper  money  of,  174  n. 

Savings,  in  England,  97;  in  France, 
146,  193-194;  in  Germany,  267, 
268;   in  United  States,  354-358. 

Sehgman,  E.  R.  A.,  136,  272,  n.,  348  n. 

Serbia,  37,  51,  154-155,  220,  241,  285. 

Shantung  Railway,  34. 

Sherbrooke,  Lord,  100,  n. 


Siemens,  7,  25. 

South  America,  30,  109,  154,  212,  258, 

286,  314;  trade  of,  74;  with  United 

States,  314-317;  exchange  on,  317- 

319,  344-346. 
Sprague,  O.  M.  W.,  325,  n.,  326,  n.  2. 
Stock  exchange,  crisis  on  English,  80; 

closed,  81;    French,  156,  157,  169- 

170;      German,     220;      in     United 

States,  288,  321. 
Sugar,  20. 
Sweden,  77,  107,  132,  223,  240,  245, 

252,  342. 
Switzerland,  132,  223.  n.  3,  240,  245, 

251-252,  342. 

Taxation,  41,  43,  56;  versus  loans, 
134-135;  in  Great  Britain,  41,  134- 
136;  in  France,  156,  195;  in  Ger- 
many, 258,  272,  273. 

Textiles,  20,  107,  158. 

Thomas,  Sidney  Gilchrist,  7, 19, 24,  25. 

Trade,  of  Great  Britain,  106-109,  126; 
with  Germany,  30-32,  97,  106;  of 
France.  182,  186;  of  Germany,  30- 
32,  77,  222-224,  244;  of  United 
States,  289,  306-319;  with  South 
America,  74,  314-317. 

Transportation,  cheapened,  effect  of, 
3-5;  ocean,  5. 

Treasury  bills,  British,  91,  137-138; 
French,  191;  German,  228. 

Treasury,  notes,  German,  203,  227, 
232,  261,  269. 

Turkey,  28,  31,  37,  154,  200,  212,  234. 

United  States,  comparative  growth  of, 
14,  15,  17,  30;  why  in  war,  38;  in 
Civil  War,  55,  111;  demand  for 
goods  of,  57;  dependence  of,  on 
Eiu-opean  credit,  279-281 ;  debt  of, 
to  Europe,  281 ;  depression  in,  before 
the  war,  282;  attitude  of  Congress 
to  business  in,  282;  exports  of  gold 
from,  282,  290,  291,  296,  328- 
336,  337;  gold  imports  to,  337- 
341,  348;  selling  of  securities  of, 
113,  127,  283,  285-288,  320-322; 
foreign  exchange  in,  283,  292,  319- 


406 


INDEX 


346;  effect  of  war  on  credit  in,  284, 

292,  296;  credit  system  of,  284,  296; 
stock  exchange  in,  closed,  288; 
opened,  321 ;  upheaval  of  trade,  289, 

293,  306,  317,  335;  exports  of,  308- 
314,  318,  325,  333;  imports  of,  289- 
290,  306-307,  314,  317;  shipping  of, 
291;  effect  of  war  on  industry,  293; 
on  savings,  356;  banking  in,  294- 
296,  298,  303,  305;  hoarding  of 
banks  in,  334;  Aldrich-Vreeland 
notes,  299-305;  bank  notes  in,  301; 
crisis  in,  recovery  from,  305;  cause 
of  crisis,  306;  cotton,  309-312;  iron 
and  steel,  312;  New  York  City  loan. 


330;  Gold  Pool,  331-333;  inflation 
in,  347-353,  351;  readjustment  to 
war,  337;  loans  to  Allies,  67,  129, 
339-340,  359-361 ;  international 
balance-sheet  of,  341;  advantage 
of  gold  stock  to,  347;  prices  and 
credit  in,  348,  352;  governmental 
credit  of,  357-361;   wealth  of,  355. 

Wants,  47. 

Wealth,    British,    78;     French,    194; 

German,  238,  275;  of  United  States, 

355. 
Withers,   H.,   40,   n.,  86,   a.,  89,   n., 

93,  n.,  95,  n. 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

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